FIS’s Worldpay Spinoff Is Jumbled by Tough Outlook

Fidelity National Information Services

FIS -12.50%

is splitting into two parts. Both have their challenges.

FIS said Monday that it plans to do a tax-free spinoff of its merchant-solutions business, which facilitates payments for sellers such as retailers, within the next 12 months. The move would unwind a previous merger to create two companies: Worldpay for payments; and FIS, which provides banks and capital-markets firms with software and other services.

This should be good news for shareholders, with the financial-technology conglomerate picking a lane after a management change and strategic review. FIS’s merchant-solutions growth has been curtailed by shifts in payments methods and patterns after the height of the Covid-19 pandemic, particularly among smaller businesses. The move is intended to give the new Worldpay the balance-sheet flexibility to make necessary investments or acquisitions to get it into higher-growth segments. Additionally, Worldpay’s premerger chief executive,

Charles Drucker,

will return as a strategic adviser for the spinoff and serve as CEO of the new payments company. In the longer term, this should also allow for a rerating of the remaining banking and capital-markets business, where comparable stocks typically trade at a higher multiple.

However, FIS on Monday also reported its fourth-quarter results and gave guidance that for now might be overshadowing those longer-term considerations. Through last week, the stock had been up more than 11% year to date, but it dropped 13% on Monday.

Notably, the company highlighted a growth challenge for its banking-and-capital-markets businesses. FIS said that though it still has big deals in the pipeline with large financial institutions, customers have been reluctant to complete them with the economy in such an uncertain state. These elongated sales cycles are having an effect in the near term. The company guided toward 1% to 3% organic-revenue growth this year across those units. It outlined a 3% to 5% “normalized” growth rate without the longer sales cycle and without some reductions in nonrecurring revenue.

Meanwhile, the outlook for merchant solutions highlighted the need for reinvestment as the company guided toward a 2%-to-4% organic-revenue decline in 2023 for that business. Factors holding growth back include sales attrition because of a lack of new products, as well as expected economic slumps in the U.S. and U.K.

In the meantime, FIS is aiming to achieve $500 million in cash savings by the end of 2023 through an efficiency program across the combined company.

FIS could be on the path toward better growth or higher valuations, both for the untethered Worldpay and its remaining core business, which had previously thrived on steady expansion and cash generation rather than the kind of self-disruptive growth focus that payments companies need. But investors might need to grit their teeth through some tough quarters ahead.

Write to Telis Demos at [email protected]

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