First Data IPO: Enormous Debt Is A Warning Sign And An Opportunity

  • Payment processing giant, First Data, returned for a second round to the public markets.
  • The company was acquired by KKR for $30B and currently carries more than $20B of debt on its books.
  • As capital restructuring process is in place, some investors might want to use the First data IPO price for an attractive entry point into First Data.
First data IPO

As mentioned in the Tech IPO news weekly, Payment processing company, First Data, is reportedly planning to IPO by the end of this year, seeking to raise $2.5B. First data has the biggest merchants’ network in the payment processing market, with approximately 6 million business locations and more than 4,000 financial institutions in 118 countries worldwide. First Data provides essential financial services in three business lines:

  • Global Business Solution (‘GBS’) – provides retail point-of-sale and e-commerce services that include mobile payments, web-store solutions, and cloud-based, point-of-sale operating system.
  • Global Financial Solutions (‘GFS’) – provides credit solutions for bank and non-bank issuers. Services include retail private-label cards, financial software systems, and lending solutions.
  • Network and Security Solutions (‘NSS’) – provides value-added solutions, such as electronic funds transfer, network solutions, debit card processing solutions, security and fraud solutions, mobile wallets support, and more.

The company is a financial sector veteran that was founded back in 1971 and was fully acquired by American Express (NYSE:AXP) in 1983. Nine years later, First Data IPO was held, spinning-off the company from American Express. Three years after that in 1995, the company merged with First Financial Management Corp and absorbed Western Union (NYSE:WU) that was later spun-off from First Data in 2006. Leading investment firm Kohlberg Kravis Roberts (NYSE:KKR) acquired First Data for $30B, which was financed with $24B of debt and took the company private.

First Data IPO Proceeds To Refinance Long-Term Debt

As happened in previous cases when PE-backed companies went public, they use the offering proceeds to refinance the company’s debt and repay some of the higher rate notes. First Data currently has $21B of long-term debt on its balance sheet and most of the debt (55%) is due between 2020 and 2022.Fresh Data IPO proceeds will be used to redeem or repurchase the outstanding amount of 11.25% senior unsecured notes due 2021 and a portion of the 12.625% senior unsecured notes due 2021.

Repaying the 2021 notes is part of KKR’s plan to restructure First Data’s capital that started last year. In 2014, the company partially redeemed four long-term notes due in 2020 and 2021 with high-interest rates. Over the next 12 months, $10B of the company’s debt becomes callable on more favorable terms and KKR is planning to use this opportunity to refinance some of the debt to reduce interest expense and increase the free cash flow.

First Data Revenue and Profitability

First Data processes large number of transactions. In 2014 the company processed 24 billion transactions worth more than $1.7 trillion, which equals to 10% of the U.S. GDP and 28% of the world’s e-commerce transactions. The company uses its worldwide network, its vast experience in the market and effective operations to generate fairly stable quarterly revenues of around $2.7B each quarter mainly from the GBS business line that represented 59% of the company’s revenue in 2014. The other segments NSS and GFS generates around 20% each. Operating profit is also stable as shown in Chart 1 below; however, the company struggles to break even and narrow its net loss.

FDC_Chart 1_091415

The large, long-term debt that was discussed earlier is reflected in the incredible gap between the company's net loss and Adjusted EBITDA as shown in the Chart 2 below.

FDC_Chart 2_091415

First Data’s capital restructuring process started in 2014 with First Data Holdings (FDC’s parent company) investing $3.5B, which reduced $200M (on annual basis) from the company’s interest expenses. The additional steps (including use of proceeds from this offering) are expected to reduce interest expenses even further.

Who Should Participate in the First Data IPO?

First Data is not very compelling for most retail investors. Growth investors will find the company’s single digits top-line and adjusted EBITDA growth rates pretty disappointing. Dividend growth investors will not find it relevant, as the company does not pay any dividends. Value investors will be disappointed by the company’s net loss and incredible long-term debt. It seems that investors cannot find any added value in First Data. However, that is in the process of changing, as KKR works to restructure First Data's capital, and the company could return to profitability in ’16 or ’17. Moreover, an improved FCF could make it attractive in a few years.

Long-term investors who believe that the company’s restructuring plan will improve its financials and drive the stock price higher might want to participate in the IPO. However, historically hyped IPOs like this one may pop significantly on the first day of trading – so investors should be careful if the company slips into overvaluation territory.


Payment processing giant First Data is planning to complete its IPO by the end of the quarter. The company that was acquired by KKR eight years ago and went private is now returning to the public markets as part of KKR’s broader process to restructure the company’s enormous long-term debt. While First Data controls the payment processing market without a doubt, its debt is a flashing red light for retail investors; however, long-term investors could look at it as an opportunity to enter this financial giant at a reasonable price before the expected growth. Once the company prices its IPO shares, I will revise my thesis and will be able to set a reasonable entry price range for this IPO.

Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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