[ad_1]
As Worldpay gears up for a separation from parent Fidelity National Information Services and an acquisition strategy next year, it will be carrying a debt rating lower than at least one rival.
Worldpay landed an initial BBB- rating from Fitch Ratings this month while rival Global Payments snagged a slightly higher BBB rating.
While both ratings are investment grade, earning a higher mark can make a difference when it comes to the expense of acquisitions. Both companies have an acquisition agenda in the fast-growing industry so the more expensive their debt is, the more costly that strategy may be.
Worldpay ranks as the second-largest non-bank merchant acquirer in the U.S., handling $1.66 trillion in purchase volume last year, behind Fiserv, which was the largest, with $1.73 trillion in volume, according to industry research firm The Nilson Report. Worldpay operates in 150 countries, but the bulk of its revenue, 70%, derives from North America, Fitch said. (Fitch doesn’t rate Fiserv.)
Global Payments was the third-largest non-bank merchant acquirer in the U.S. with $722 billion in purchase volume last year, according to Nilson.
Scale may give both Worldpay and Global payments an advantage in the approximately $75 trillion worldwide market, but it doesn’t mean they can stop growing. “Scale is important in payments due to consolidation among U.S. financial institutions as well as competitive pressures,” Fitch said in a Wednesday report on Global Payments.
’Highly competitive’ market
Debt ratings agency S&P Global Ratings echoed that sentiment in a July report on the Atlanta-based company, calling it a “highly competitive industry” requiring ongoing investments.
For Worldpay, the competition from legacy players like Global Payments, Fiserv and PayPal as well as evolving fintechs such as Adyen, Block and Stripe, has been troublesome. The company had annual losses for each of the past three years, parent FIS revealed in a regulatory filing this month.
Part of the problem at Worldpay, under Jacksonville, Florida-based FIS’s roof, has been that it hasn’t been able to grow as rapidly as some rivals, especially upstart fintechs, Fitch analyst Rob Galtman said in a recent interview.
That followed on Fitch’s recent analysis of Worldpay. “There is meaningful tech disruption and pricing competition from both ‘legacy’ fintechs, large technology providers, as well as younger, software-centric fintech companies,” Fitch said in the Sept. 18 report.
Indeed, Worldpay’s revenue growth slowed to 4% last year, from nearly 16% in 2021, according to a recent FIS filing with the Securities and Exchange Commission breaking out financials for the unit. Annual revenue was about $5 billion last year, $4.8 billion in 2021 and nearly $4.2 billion in 2020, the filing said.
FIS executives have lamented that the company didn’t have sufficient capital available for Worldpay acquisitions, and have said that will change when the unit becomes a standalone company. The sale of a majority stake to Chicago private equity firm GTCR is expected to be completed early next year.
FIS CEO Stephanie Ferris has said that Worldpay will focus on e-commerce growth after it’s spun off. That could help it catch up with younger rivals that have focused on that realm from the start.
Hunt for acquisitions
Proliferating fintech rivals may be a curse when it comes to competition, but their large numbers are a benefit for legacy players like Worldpay and Global Payments in their hunt for acquisitions.
“There are constantly new fintechs being started,” Galtman said. “They will not be lacking M&A targets, and valuations have gotten cheaper,” than they were two years ago.
While Galtman declined to pinpoint any specific targets, he said that tech-centric and software-centric businesses are the types of companies that Worldpay would be likely to pursue. He noted that Worldpay doesn’t have a unit that competes with Fiserv’s Clover unit, which caters to small and mid-size outlets. “It’s a gap in their portfolio,” Galtman said of Worldpay.
The Clover unit has been boosting Fiserv revenue results recently, taking the company into a number of verticals from stadiums to restaurants.
As Worldpay and Global Payments seek to grow in the expanding market, Galtman doesn’t see any drawbacks to the companies currently being tied to the heavy credit card and debit card use in the North American market. In markets outside the U.S., cards are giving way to more digital alternatives.
Nonetheless, cards continue to take share from cash and checks, Fitch said in the Worldpay report. “Global card usage varies meaningfully by country, but will continue to capture payments share in the future,” it stated.
Global Payments has swallowed a number of companies in recent years, including its $4.3 billion acquisition of Evo Payments last year. As a result, it has gained integration experience from those deals, but potential merger missteps remain a risk in the future, Fitch noted.
The same could be true for Worldpay related to large transactions, the ratings agency said, noting that it’s headed toward increased leverage.
Worldpay’s business and financial metrics “compare well” versus Global Payments, “although it is expected to operate with meaningfully higher leverage in the next few years under private ownership,” the Fitch report said.
Correction: This story has been updated to correct the headline’s ranking of the companies.
[ad_2]
