For one, it turns out that the Bluepay and Cardconnect acquisitions were money well spent. FDC’s 2013
acquisition of Clover also looks increasingly smart as Clover has distanced itself from the pack, along
with Square, as a leader in the next gen POS device market (FDC’s SMB direct business has seen
merchant attrition go from 40% in 2015 into the mid-20s today, a change they attribute largely to
Clover). FDC’s position in the fast-growing integrated payments channel has improved dramatically and
our checks indicate that they are at least maintaining if not gaining share in this market segment.
Growth in the North American GBS segment has followed, accelerating from flattish in 2016/2017 to
MSD in 2018 and management is guiding for similar levels of growth in 2019, even with continued
headwinds in the bank JV channel which should eventually subside as FDC’s efforts to digitize this
channel gain traction.
FDC now has a collection of assets which should be able to drive steady MSD organic growth for the
foreseeable future (e.g., 20% of the business is international and growing in the mid-teens). We’d refer
folks to the company’s spring investor day presentation which does a good job breaking down the
business mix and relative growth rates (https://investor.firstdata.com/webcasts-events-and-
With the house now in order, FDC should now be able to refocus its efforts on debt paydown. The
company’s 5.3x net leverage (down from ~6x at the beginning of the year) clearly elicits an allergic from
many investors, particularly among long only investors as evidenced by the lack of representation of the
large mutual fund complexes on the holders list. Management has guided to leverage in the low 4x
range by year-end 2019. We think crossing the rather arbitrary ~4.5x level is an important milestone
and should make FDC shares more appealing to a broader set of investors.
There are also some interesting call options that could work in FDC’s favor. For one, KKR’s ownership
and the related dual-class structure precludes FDC’s inclusion in the key indices. Management has
indicated that both they and KKR have a desire to solve this issue over the medium-term (~2 years). This
could provide a technical tailwind to the extent new classes of investors emerge.
Second, while I won’t spend much time on it because I don’t think it’s necessary to get excited about the
investment, some investors point to the potential value of Clover within FDC. Clover processes a similar
amount of transaction volume, is growing faster, and is just beginning to roll out value-added products
and services in addition to basic payment processing….and Square’s market cap is $22bn vs. FDC’s
enterprise value of $32bn. There are differences in the underlying economics and some of the Clover
volumes are cannibalizing FDC’s legacy business so not a totally fair comparison so file this under option
Lastly, there is a school of thought that FDC is one of the few assets that could be used to create a
proprietary closed loop payment, similar to what JPM has done with Paymentech. This view hinges on
the view that the card networks (V, MA) are over-earning and too dominant relative to the card issuers.
I will dispense with the heresy of criticizing two of the best business models on the planet and just point
out that (a) there is empirical evidence of this in JPM’s actions, i.e., Paymentech has a special deal with
Visa in which it leases capacity at more attractive economics, and (b) FDC tinkered with such an
approach prior to the financial crisis with something called FDNet. Ultimately Visa shut this effort
down…but then caved to JPM a few years later. (Hmm) Under this theory, FDC is a nearly unique
strategic asset that could have great appeal as an acquisition target and/or platform that could be