Payments processor Fiserv to buy rival First Data in $39bn deal
Deal comes amid rising M&A activity in payments industry
US payments processor Fiserv has agreed to purchase heavily indebted rival First Data in an all-stock deal that values the company at roughly $39bn, in one of the largest financial services transactions in recent years.
The deal comes as disruption in the payments industry hots up, with a wave of consolidation seen among traditional financial services providers and technology groups that have rattled the space.
First Data stockholders will receive 0.303 shares of Fiserv for each share of First Data they currently hold, worth roughly $22.74 based on the close of trading on Tuesday.
The offer represented a premium of nearly 30 per cent to First Data’s closing share price on Tuesday of $17.54, but was nonetheless below a recent high marked last September when First Data shares climbed to $26.62. The share price dropped heavily a month later after the payments processor missed its profits estimates and trimmed its revenue growth targets.
Merger and acquisition activity in payments technology, which includes products such as Apple Pay and back-end infrastructure that enables transactions, has been on the rise as consumers and merchants turn increasingly cashless payment methods.
First Data has lumbered under a multibillion-dollar debt burden since its $28bn takeover by private equity group KKR ahead of the financial crisis. The company struggled with those financial obligations, earning junk ratings from the major credit rating agencies in the US. One person with knowledge of the deal said its roughly $18bn of debts had limited First Data’s ability to invest in its core business, and that the takeover by Fiserv would give the combined group a stronger investment grade-rated balance sheet.
“Through this transformative combination, we expect to redefine the manner in which people and institutions move money and information,” said Jeffery Yabuki, the chief executive of Fiserv.
First Data’s Clover, a tablet-based, point-of-sale technology unit used by boutique coffee shops, restaurants and other small businesses, has been one of the biggest drivers of the company’s growth in recent years.
Designed to compete with start-up technologies such as Square, transaction volumes on Clover have climbed to a $70bn annualised rate, the company said, up 45 per cent year over year.
First Data shares climbed 27 per cent in pre-market trading to $22.21, while Fiserv gained just over 1 per cent to reach $76.
JPMorgan Chase and law firm Sullivan & Cromwell Are advised Fiserv. Bank of America and Simpson Thacher & Bartlett provided advice to First Data.
Gapping down
In reaction to disappointing earnings/guidance:
- EFII -24.4%, ADNT -11.5%, SNAP -10.6% (expects to report Q4 revenue/adj EBITDA results that are slightly favorable to the top end of previously reported quarterly guidance ranges; CFO Tim Stone to resign to pursue other opportunities), JWN -8.9% (Nordstrom reports holiday comps +1.3%; EPS is expected to be around the low end of the Company's prior outlook range), HAFC -8.5%, PSO -7.4%, FULT -6.7%, ERJ -4.8%, F -2% (Q4 guidance), FSK -1.7%, BLK -0.9%, PNC -0.5%
M&A news:
- FISV -2.2% (to acquire FDC for 22.74 per share in all stock deal
Other news:
- APTX -60.2% (reports top-line results from Phase 2 clinical study of NYX-2925 in painful diabetic peripheral neuropathy -- NYX-2925 did not achieve statistically significant separation from placebo on primary endpoint)
- PCG -8.8% (continued weakness; Teleflex to replace PG&E in S&P 500)
- RVNC -5.6% (proposes $100 mln common stock offering)
- STML -2.9% (prices underwritten public offering of 8,888,889 shares of its common stock at a price of $9.00 per share)
- FPRX -2.3% (announces restructuring to focus on clinical development and later-stage research priorities; anticipates ending 2019 with $148-153 million in cash, cash equivalents )
- XLRN -1% (offering of 5,348,838 shares of common stock at a price to the public of $43.00 per share )
- TFX -0.8% (Teleflex to replace PG&E in S&P 500)
- NBEV -0.8% (signs agreement to develop and distribute Marley branded cannabis-infused beverages)
- PBR -0.6% (reported 2018 production)
Analyst comments:
- HPE -3% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- NTAP -2.8% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
- BUD -2.6% (downgraded to Underperform from Hold at Jefferies)
- INCY -1.5% (downgraded to Neutral from Buy at UBS)
- DVN -1.3% (downgraded to Equal Weight from Overweight at Barclays)
- SYY -1.2% (downgraded to Neutral from Buy at BofA/Merrill)
Gapping up
In reaction to strong earnings/guidance:
- UAL +5.4%, BAC +4.7%, GS +3.1%, CMA +1.3%, BK +0.7%, USB +0.7%, PNFP +0.6%
M&A news:
- FDC +23.1% (to be acquired by Fiserv (FISV) for approximately $22.74/share in all-stock deal)
Select Airline related names showing strength:
- JETS +5.2%, AAL +2.4%, LUV +2.1%, DAL +1.4%, ALK +1.4%, JBLU +1.3%, SAVE +0.5%
Other news:
- MERC +10.7% (to join S&P SmallCap 600)
- TYME +4.2% (continued strength)
- TGE +3.4% (increases quarterly dividend)
- ALSK +2.7% (refinances credit agreements)
- TLRY +2.1% (modestly rebounding)
- UNIT +1.2% (Uniti has agreed to sell Uniti Fiber's Midwest operations to MIP, while Uniti will retain its existing Midwest fiber network)
Analyst comments:
- NTNX +3.8% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- TDC +2.7% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- MET +1.3% (upgraded to Buy from Neutral at BofA/Merrill)
Early premarket gappersGapping up:
- MERC +9.5%, TYME +6.9%, UAL +6.3%, JETS +5.2%, BK +5%, TGE +3.4%, TLRY +2.7%, ALSK +2.7%, BAC +2.4%, SAVE +2%, AAL +1.8%, LUV +1.4%, DAL +1.2%, UNIT +1.2%
Gapping down:
- EFII -18.5%, SNAP -11.3%, HAFC -8.5%, JWN -7.1%, FULT -6.7%, RVNC -4.4%, PCG -2.6%, FPRX -2.3%, FSK -1.7%, TFX -1.2%, PBR -1%, BLK -0.8%
WeWork’s CEO Makes Millions as Landlord to WeWork
Adam Neumann has bought properties and leased them to his co-working startup, sparking conflict of interest concerns
For more than two months after employees at International Business Machines Corp. moved into a Manhattan building managed by office space giant WeWork Cos., frequent elevator problems forced workers to climb the stairs of the 11-story building and prompted complaints to the company.
One of the landlords behind the building was no ordinary owner: It was Adam Neumann, WeWork’s chief executive, who leased the property to WeWork after buying it, according to people familiar with the situation.
Mr. Neumann has made millions of dollars by leasing multiple properties in which he has an ownership stake back to WeWork, one of the country’s most valuable startups. Multiple investors of the privately held company said the arrangement concerned them as a potential conflict of interest in which the CEO could benefit on rents or other terms with the company.
A WeWork spokesman said all related-party deals are reviewed and approved by the board or an independent committee and disclosed to investors. Mr. Neumann declined to comment through a spokesman.
WeWork, which was recently valued at $47 billion by investor SoftBank Group Corp. , signs long-term leases for office space with landlords, then subleases the space on a short-term basis to companies. Mr. Neumann, the 39-year-old executive who founded WeWork in 2010, is WeWork’s largest individual shareholder and has voting control over the company.
In at least one instance before he secured full control over the company, Mr. Neumann wasn’t able to complete a similar deal. When WeWork was negotiating a lease on a Chicago building in 2013, he tried to buy a stake of up to 5% in the building—210-220 N. Green St.—as part of the deal, people familiar with the negotiation said. WeWork’s board raised concerns about the deal, citing a potential conflict of interest, and WeWork paid for the stake instead, one of the people said.
The next year, Mr. Neumann effectively gained control over the company. As part of an investment round for WeWork in 2014, he was granted Class B shares that gave him 10 votes per share, and now he has more than 65% of the overall share vote, according to WeWork corporate filings.
Mr. Neumann has since bought up several properties through investor groups and leased some of them to WeWork.
In a prospectus related to a debt offering last year, WeWork said it had leases with multiple properties owned in part by Mr. Neumann. It also said WeWork paid more than $12 million in rent to buildings “partially owned by officers” of WeWork between 2016 and 2017, and future payments total more than $110 million over the life of the leases. The specific properties weren’t listed.
In addition to the IBM building at 88 University Place, in which Mr. Neumann owns a 50% stake, he has invested in properties in San Jose, Calif., where WeWork is the tenant or expected to lease in the future, multiple people familiar with the deals said.
There, he is a main investor in a group that has been buying up numerous properties in the downtown over the past year-and-a-half, including a 14-story tower built for the Bank of Italy in 1925, these people said.
Mr. Neumann’s plan is for the San Jose portfolio to host an urban campus of sorts—full of WeWork offices and related properties, including a residential building called WeLive, these people said. The developments would require some new construction, and WeWork has tapped famed architect Bjarke Ingels to design a master plan, these people said.
Otto Lee, an intellectual property lawyer who sold his offices in the Bank of Italy building to the investor group, said he wasn’t aware Mr. Neumann was one of the buyers. “They have been quite tight-lipped about exactly who the people funding it are,” he said.
Another of the San Jose properties, St. James Plaza, which the group bought for $40 million in the summer, has signed a lease with WeWork.
Corporate governance experts say Mr. Neumann’s ownership of buildings he leases to WeWork is unusual for a large company. Corporations typically bar executives from similar arrangements, given that companies risk paying too much in rent or leasing buildings they ordinarily wouldn’t, they said.
“In a public company, that would be considered highly controversial,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Usually human beings tend to think of themselves over the company itself when they’re on the other side of the transaction.”
In New York, the deal at 88 University came together in 2015 after Mr. Neumann partnered with fashion designer Elie Tahari to buy the building for $70 million. The pair planned a renovation that included an overhaul of at least one of the elevators, said a person involved with the deal.
The owners subleased the building to WeWork. In turn, WeWork struck a deal with IBM, which needed space quickly and moved there in spring 2017. Mr. Neumann’s interest in the building was revealed last year by real-estate publication the Real Deal.
Soon after IBM arrived, one of the two elevators was out while the other was frequently breaking, causing lengthy waits and long slogs up the building’s narrow stairs.
IBM executives, frustrated about their working conditions, complained to WeWork about the broken elevators, said people familiar with the matter. While landlords typically are responsible for elevators, WeWork had signed a so-called triple-net lease with Messrs. Tahari and Neumann, in which WeWork was responsible for fixing issues like elevators. As part of that deal, the landlord set aside funds to WeWork to pay for such renovations, a WeWork spokesman said.
An IBM spokeswoman declined to comment.
The building’s value, meanwhile, has gone up, and the owners have been able to borrow more money by refinancing the property’s debt. Late last year, Messrs. Neumann and Tahari took out a $77.5 million loan, according to loan adviser Meridian Capital Group, $7.5 million more than the prior loan to buy the building.
Mr. Neumann owes his personal wealth largely to sales of WeWork stock. It is unclear how much WeWork stock he has sold, but he has told some friends it is in the hundreds of millions of dollars.
Bank of America beats by $0.07, beats on revs (26.55)
- Reports Q4 (Dec) earnings of $0.70 per share, $0.07 better than the S&P Capital IQ Consensus of $0.63; revenues rose 10.7% year/year to $22.89 bln vs the $22.37 bln S&P Capital IQ Consensus.
- Net interest income of $12.3B ($12.5B FTE) -- Increased $0.8B from 4Q17, reflecting the benefits from higher interest rates as well as loan and deposit growth, modestly offset by loan spread compression and higher funding costs in Global Markets
- Net interest yield (FTE basis) of 2.48%, up 9 bps
- Provision for credit losses decreased $96 million to $905 million; Net charge-off ratio declined to 0.39%
- Efficiency ratio of 58% improved 432 bps
Germany’s defence dilemma exposed by fighter deal
Choice of Tornado replacement will affect European industry and US strategic alliance
How serious is Germany about raising defence spending and becoming a more muscular military power? The world may be about to find out.
Any day now, the defence ministry in Berlin is expected to announce how it intends to replace the Luftwaffe’s ageing fleet of 85 Tornado fighter jets, in a deal worth many billions of euros. For a country that finds itself constantly under attack for skimping on defence spending, the investment will be headline-grabbing.
Yet money alone does not explain why the decision is likely to be controversial. At heart, the decision on a new aircraft will be a choice between Germany’s two most important strategic alliances — Europe and the US.
“What you buy determines who your closest partner will be in the coming decades,” says Christian Mölling, a defence analyst at the German Council on Foreign Relations in Berlin. “But it also marks a crucial decision about the future of our defence industry: will the emphasis be on European or transatlantic co-operation?”
In practical terms, the decision will be between the Eurofighter, which is built by Airbus and other European groups, or one of three US-made warplanes: the F-35A, the F-15E or the F/A-18E/F.
Buying at least some planes from the US must look politically tempting. In recent years, President Donald Trump has lashed out at Germany for two reasons above all: Berlin’s comparatively miserly defence expenditure, and the bulging trade deficit between the two countries. The acquisition of a few dozen US aircraft would help on both fronts, and could make Nato’s next summit less uncomfortable for Chancellor Angela Merkel.
Advocates of a European solution, however, have no time for this logic and say European companies are perfectly able to produce a military aircraft that suits Germany’s need. Buying American, they argue, would be a terrible signal for the future of Europe’s defence industry, at a time when Germany and France are jointly committed (at least on paper) to develop and build a super-modern next-generation “future combat air system” after 2035. For that project to see the light of day, European governments will need to preserve knowhow and production capabilities at home — not farm them out to the US.
That ambition would be undercut, some believe, even in a scenario where the Luftwaffe splits its order, buying both the Eurofighter and a US aircraft.
Still, most experts predict that is precisely what Berlin will do. Depending on the relative size of the contracts, this mixed approach may even enable the government to keep all sides sweet.
There is one additional pitfall, however. One of the German Tornado fleet’s tasks is to carry and deploy US nuclear weapons stationed at Büchel, western Germany, as part of Nato’s “nuclear sharing” arrangement. Any replacement would have to do the same and be certified to do so by the US. In the case of the Eurofighter, that certification may not be easy to obtain, casting doubt over Germany’s ability to uphold a key element of Nato’s nuclear deterrence.
Ultimately, though, the how of the decision may be as important as the what. German leaders have promised for years that the country is ready to step up and take more responsibility in the field of security and defence. Here is a chance for Ms Merkel and the German military establishment to come out and explain three uncomfortable truths: why Berlin needs to spend billions of additional euros on defence; why a strong European defence industry is in Germany’s national interest; and why the country’s armed forces have a role to play in the field of nuclear deterrence.
It is the kind of hard-nosed conversation that German politicians and the German public have a long history of avoiding. The looming Tornado decision will show what — if anything — has changed.