KKR & Co. LP; Market Cap (as of 03/10/2015): $7.85bn
First Data Corporation; Market Cap (as of 03/10/2015): N.A.

 

Introduction

On October 1st, 2015 the KKR-owned payment-processing company, First Data, announced the launch of its initial public offering, aiming to raise about $3.7bn. Apart from being the biggest US listing so far this year, it is the most highly leveraged large private equity-backed company to go public since HD Supply Holdings in 2013.

About First Data Corporation

Founded in 1971, First Data Corporation is an Atlanta-based leader in global payment technology solutions, which provides a broad range of services to merchants, financial institutions and card issuers worldwide. Thanks to its superior technology and high quality encryption systems, First Data enables businesses to accept electronic payments, helping financial institutions to issue credit, debit and prepaid cards, and routing secure transactions between them. First Data serves 6m business locations and 4,000 financial institutions all over the world and processes transactions worth nearly $1.9tn per year, which is equivalent to almost 10% of US GDP in 2014. Moreover, the company carries out almost 45% of all US credit and debit transactions and has 80% market share in key customer segments such as gas and grocery stores.

 

About KKR (Kohlberg Kravis Roberts)

KKR (NYSE:KKR) is a New York-based multinational private equity firm, which is specialized in leveraged buyouts. Since 1976 when the firm was founded by Jerome Kohlberg and the cousins Henry Kravis and George Roberts, all of whom had previously worked together at Bear Stearns, it has completed over $400bn of private equity transactions. In 2007 KKR in partnership with TPG and Goldman Sachs’ buyout arm completed the largest takeover in history to date. It was the record $32bn leveraged buyout of TXU Corporation, an electric utility company (now known as Energy Future Holdings Corp.).

The Story Behind KKR’s Investment in First Data

First Data was taken private by KKR and its investors in a $26bn deal in 2007, at the peak of the leveraged-buyout boom that preceded the financial crisis. As First Data is the processor of trillions of dollars worth of credit-card, debit-card and other transactions for businesses, its performance is highly sensitive to consumer spending levels. As a result, when the financial crisis hit the economy, the company was struggling to grow since the credit-card transactions, being the main source of income, dropped significantly. Furthermore the company was facing the increasing competition from rivals such as Vantiv LLC and Square. Since 2008, for 7 years, the company was making losses, in some cases exceeding $1bn. However, in 2013 following another round of management reshuffling and Frank Bisignano leaving a top role at JP Morgan to become the CEO of First Data, the company managed to post its first quarterly profit in more than seven years. After his appointment, the company established a new road map to improve the sluggish growth, which was stuck at c. 3% for years. According to the new strategy, First Data aimed at expanding its operations beyond the payment processing business and positioning itself as a provider of new commerce-enabling technologies. In line with this new strategy, the company has completed acquisitions of several high-tech start-ups such as Clover, Perka, Gyft, EasyWay Ordering, and Transaction Wireless in order to enhance innovation and catch up with the changing consumer trends. Moreover, in the same year KKR made an unconventional move for a private equity firm, whereby it injected additional $1.2bn in cash to help First Data rebound from previous losses and reshape its business. In fact, additional cash helped the company attain some deleverage: the annual interest payments on debt were reduced by $375m. This all helped the company get better-equipped for the IPO.

Deal Structure

First Data is aiming to raise approximately $3.7bn from the placement of 160m new class A common shares, which would value the company’s equity at around $18bn, and make it the largest IPO of the year. Based on the investor demand in the roadshow, the price is expected to be settled between $18 and $20 per share. The company will also grant its underwriters an over-allotment option to purchase up to 24m more shares, which is a way to balance demand and supply during the execution. In addition, First Data pledges to allocate 5% of the new shares to its employees and clients. The company aims to use the proceeds from the IPO to pay down two tranches of its senior unsecured notes with the total amount of $2.5bn. KKR, its largest shareholder, is not expected to sell any stock in the deal and will, therefore, be able to realize gains through future stock offerings.

 

Main Challenges

Although First Data has established a solid position in the market, the company has been frequently challenged by the new and dynamic competitors. One of the most significant competitors is Square, which was founded by Jack Dorsey, the co-founder of Twitter. Rapidly enhancing its customer base in the US, Canada and Japan, Square provides point-of-sale systems that take care of digital receipts, inventory and sales reports as well as providing data analytics and feedback to its customers. Furthermore, it is speculated that Square will have its IPO before the end of 2015, which could diminish the investors’ appetite for First Data as the company looks more financially stable and has a strong management team.

Apart from the potentially more attractive alternatives for investors, the company’s main issue is its massive debt burden. According to the company’s IPO prospectus, the debt stands at about eight times of the company’s adjusted EBITDA. Despite a significant decrease in the debt level over the years, the comparison with its peers does not seem to be assuring the positive trend. In fact, rivals such as Visa and PayPal carry almost no debt. Therefore, there is a substantial level of uncertainty on how the roadshow turns out and whether the expected $18 to $20 range could be a feasible target for the company’s share price.

Current IPO Environment

The time chosen for First Data to go public is relatively quiet, as the macroeconomic volatility prompted issuers to delay floatations. In fact, according to data of Renaissance Capital, about 138 IPOs have priced so far this year, down 35 percent from last year. Moreover, those stock sales on average fell about 5% from their offering price post-IPO. Some significant buyout targets still remain privately held. Among them are Clear Channel Communications (now known as iHeartMedia), and Toys “R” Us, which K.K.R. bought with Bain Capital and Vornado in 2005. First Data’s IPO would kick off what could be a string of big deals for private-equity firms, as highly leveraged companies are seeking to tap into strong stock prices before a possible increase in interest rates makes highly indebted companies a less attractive bet.

Financial Advisors

The offering is being led by Citigroup, Morgan Stanley, Bank of America Merrill Lynch and K.K.R.’s own capital markets arm. JPMorgan Chase, one of the traditional powerhouses in equity capital market offerings, is absent on the list of underwriters following a dispute over Mr. Bisignano’s hiring of several executives from his former employer, Jamie Dimon.

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