
First Data IPO May Be Latest Stock Offering to Struggle
Updates article to include the IPO price.
NEW YORK (TheStreet) -- First Data CEO Frank Bisignano didn't do himself any favors when he went on the road recently to sell the company's initial public offering, which was priced Wednesday night at $16 per share.
The Atlanta-based payment processor's revenue rose only 1.6% in the first half of the year. But Bisignano focused instead on touting the company's "transformation" since it went private in 2007 and on cutting some of its $21 billion debt before interest rates rise. The disconnect didn't bode well for the initial public offering.
Bisignano and his team made a better impression in private meetings, and actually do have a coherent, pretty solid plan for the First Data's future, Renaissance Capital analyst Will Preston said.
But in a notably skittish market, the short-term bet was that investors would press for the low to middle end of an $18 to $20 a share range when the IPO was priced. First Data decided to price below range, selling 160 million shares and raising $2.56 billion, Bloomberg reported. Shares of the company, which now has a market value of $14 billion, will begin trading Thursday morning on the New York Stock Exchange under the ticker (FDC) - Get Report .
The outlook for the stock is not strong.
The problem is simple: First Data's calling card is that it's the leading payment services provider to the e-commerce industry, involved in 28% of global e-commerce sales volume, but it's growing much more slowly than the e-commerce industry as a whole. The Census Bureau says e-commerce sales in the second quarter were 14% higher than a year ago, but First Data's first-half sales rose less than one-seventh as fast.
Preston points out that the rise of the dollar had something to do with that -- First Data's revenue would have grown 5% to 6% if the dollar had been near last year's levels, he said. He gives a good review to the company's newer products, especially an app platform that lets outside developers run services such as employee scheduling for small and medium-sized businesses using First Data's technology, creating a new revenue stream. The company's unit that provides outsourced services to private-label credit card issuers is also growing faster than the rest of First Data.
"Think of it as 5% growth in the core, with some investments that people don't know how they will turn out yet,'' Preston said.
The bad news is, the company will still have an $18.4 billion debt load after using $2.5 billion of IPO proceeds to pay off debt, according to its regulatory filings. Most of the debt being repaid carried a 12% interest rate. The time it will take for other moves to reduce and restructure debt, and for the newer products to become big enough to help much, are the primary reasons to be cautious about First Data's IPO.
Investors will likely have to be patient with First Data. Its financial restructuring has been going on since last year, raising $6.5 billion in equity capital including the IPO proceeds. But it has a long way to go. It has $10 billion of debt to refinance in the next year, and is hoping to get lower interest rates even though Moody's Investors Service rates its credit six notches below investment grade.
Little about the IPO market recently suggests people are being patient with issuers in less than tip-top shape. Pure Storage (PSTG) - Get Reportstruggled out of the gate last week, and skeptics about this week's IPO of supermarket chain Albertsons are easy to find. Overall, Renaissance has cut its forecast for 2015 IPOs by about 20 deals since last month.
First Data reported that it had $2.66 billion in 2014 earnings before interest, taxes, depreciation and amortization, and first-half 2015 adjusted earnings before interest, taxes, depreciatin and amortization dipped $30 million to $1.27 billion. That puts the company's debt load at a still-hefty seven times Ebitda for the time being. At the same time, the proposed equity valuation of up to $18 billion works out to a total enterprise value of $36.5 billion, a relatively high 13-plus times Ebitda.
"Given the current market, you'll see pricing sensitivity," Preston said. "But KKR (KKR) - Get Report is not selling.''
Most of the company's cash flow will going to debt service even after the IPO goes through, and First Data doesn't plan to pay a dividend on common stock after the deal. The company will also be controlled by KKR's 73% post-IPO voting stake.
For equity holders, First Data offers not much control over the company, slow growth and heavy debt. While the company isn't in any trouble, it's not hard to find more attractive investments than its IPO.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








