Shares of Square (SQ) are under pressure after Fiserv (FISV) and First Data (FDC) announced they will combine in a deal with an equity value of $22B. Piper Jaffray analyst Jason Deleeuw sees the takeout valuation as "low," but does not expect another bidder to emerge. Meanwhile, his peer at BTIG argued that Square investors should be concerned, stating that even before the announcement he believed that Firs Data’s Clover point-of-sale payment platform would represent an "increasingly significant threat as it continues to ramp up."
FISERV ACQUIRING FIRST DATA: On Wednesday, Fiserv and First Data announced that their boards of directors unanimously approved a definitive merger agreement under which the former will acquire First Data in an all-stock transaction. Under the terms of the agreement, First Data shareholders will receive a fixed exchange ratio of 0.303 Fiserv shares for each share of First Data common stock they own, for an equity value of $22B, or $22.74 per share, based on closing prices as of January 15, and a premium of 29% to the five-day volume weighted average price as of that date. Following the close of the transaction, Fiserv shareholders will own 57.5% of the combined company and First Data shareholders will own 42.5%. The combination is expected to generate approximately $900M of run-rate cost synergy savings over five years, driven primarily by the elimination of duplicative corporate structures, streamlined technology infrastructure, increased operational efficiencies, process improvements, and footprint optimization. Fiserv intends to refinance the approximately $17B of debt that First Data is expected to have at the time of closing. Fiserv also said it sees fourth quarter earnings per share of 84c-85c and revenue of $1.47B, with consensus at 87c and $1.55B, respectively. The company also sees FY18 adjusted EPS $3.10-$3.11 and adjusted revenue of $5.54B, with consensus at $3.13 and $5.82B, respectively. For FY19, Fiserv expects adjusted EPS of $3.39-$3.52, and internal revenue growth in a range of 4.5% to 5% in 2019.
LOW VALUATION, NO OTHER BIDDER: Commenting on the acquisition, Piper Jaffray's Deleeuw said that the takeout valuation paid by Fiserv for First Data "seems low" given the latter's "solid" fourth quarter results and 2019 revenue growth outlook, as well as the "significant" cost/revenue synergies from the combined entity. However, First Data shareholders have the option to benefit from this value creation over time as 42.5% owners of the combined entity, he added. Further, the analyst told investors that he thinks another bidder will not emerge as he believes Fiserv offers the "necessary financial capacity and unique distribution synergies."
DEAL SHOULD CONCERN SQUARE INVESTORS: In a research note to investors following the announcement, BTIG's Palmer said Square investors should be concerned that First Data has agreed to be acquired by Fiserv. Even before the news emerged, the analyst believed that First Data's Clover point-of-sale payment platform would represent an "increasingly significant threat" to Square. First Data's focus with Clover is on middle-sized merchants, which Square is targeting for growth, and Clover will now be backed by a fintech giant with "deep pockets" that intends to accelerate the growth of the platform, Palmer contended. Additionally, he believes the rallies in payments stocks on Wednesday stem in large part from the anticipation that additional M&A in the space would be forthcoming, but views a takeout of Square as "very unlikely." The analyst reiterated a Sell rating and $30 price target on Square shares.
PRICE ACTION: In afternoon trading, shares of Square have slipped about 0.6% to $65.51. Meanwhile, Fiserv's stock has dropped over 4% to $71.66, while First Data has jumped over 20% to $21.12.
Block
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Symbol now FI
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First Data
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