DEALTALK-Fidelity National’s bet on buyback looks viable

(For more Reuters DEALTALKS, click [DEALTALK/])

* Fidelity shares could go back over $30 -analysts

* Some question wisdom of leveraged recap

* Fiserv, Lender Processing may be attractive LBO targets

By Paritosh Bansal and Megan Davies

NEW YORK, May 19 (BestGrowthStock) – Fidelity National Information
Services Inc (FIS.N: ), which spurned a $15 billion buyout offer
from a consortium including Blackstone Group LP (BX.N: ), could
see its shares rise back into the $30s in a debt-funded share
repurchase.

But in doing so, the payment processing firm is taking a
gamble that it can create more value from leveraging itself
than from being taken over. One analyst said management would
have been better served focusing on integrating a recent
purchase.

Talks over a potential $32-a-share takeover fell apart on
Monday over price, ending what would have been the biggest
leveraged buyout since the credit crisis.

Fidelity is instead pursuing a leveraged recapitalization,
which sees a company borrowing to pay a dividend to
shareholders or to buy its own shares, with the aim of
increasing shareholder return without an outright sale.
[ID:nSGE64H0FO]

Dividend recapitalizations, which fell off a cliff in
2008-9, have started to reappear as the markets have improved,
with $6.6 billion announced so far this year, according to data
from Reuters LPC.

Fidelity’s shares could reach $30-$32 in such a leveraged
recapitalization, according to RBC Capital Markets analysts.

The company could take on about $4 billion of new debt, the
analysts wrote. Fidelity already has about $3 billion in debt.

But in taking on the debt, Fidelity will have to be careful
not to overload itself, as it will remain a public company
answerable to shareholders.

“Most investors recognize that FIS (Fidelity) with its
reliable cash flow streams can handle a good amount of debt,”
said John Kraft, an analyst with DA Davidson & Co.

Kraft estimated that Fidelity’s shares could move into the
mid $30s over the next 12 months.

Fidelity’s shares were off 0.4 percent at $27.05 during
late morning trading on Wednesday. They touched a 52-week high
of $30.78 earlier this month.

Banks including JPMorgan Chase & Co (JPM.N: ), Citigroup Inc
(C.N: ), Bank of America Corp (BAC.N: ) and Credit Suisse (CSGN.VX: )
had been lined up to finance up to $10 billion of the mooted
buyout, sources told Reuters previously.

That indicates financing a leveraged recapitalization
should also be viable, and some of the same banks may
participate in it as well, although lending terms have
tightened since the Greek-related debt crisis erupted.

One firm’s analysts said Fidelity’s management should have
focused on integrating its $2.94 billion purchase of Metavante
Technologies last year instead.

“We fail to see the wisdom in this move,” Morningstar
analysts wrote. “This move strikes us as activity for
activity’s sake.”

BID VALUE

The consortium, which also included TPG Capital LP [TPG.UL]
and Thomas H. Lee Partners, pulled out because of disagreement
over price. Fidelity’s board wanted a substantial increase that
the consortium was not prepared to meet. [ID:nN17108594]

The private equity consortium’s bid was on the low-end of a
historical range, analysts said.

At $32 per share, the deal would have been struck at around
8.5 times Fidelity’s 2011 earnings before interest, taxes,
depreciation and amortization, Kraft said.

Takeovers in the payment processing sector reached a peak
in 2007 when Kohlberg Kravis Roberts [KKR.UL] bought First Data
Corp for $26 billion, paying about 16 times profits, Kraft
said. At the trough Fidelity paid 8 times profit for Metavante,
he added.

“I am sure that private equity guys are very nervous about
overpaying. It’s not an aggressive price,” Kraft said. “My
thought was 35 bucks might get the deal done.”

Indeed, Kraft did not rule out the private equity
consortium returning to the table.

“I wouldn’t be surprised if there continues to be some
dialogue,” Kraft said. “I don’t think this story is over.”

But these firms could as easily move to other companies in
the sector, where reliable cash flows mean that debt added on
by buyout firms could be serviced.

Kraft pointed to Fiserv Inc (FISV.O: ) and Lender Processing
Services Inc (LPS.N: ) as potential buyout targets. At 8.5 times
EBITDA, Fiserv and Lender Processing shares would fetch $62 and
$57, respectively, he said.

Fiserv’s shares were 75 cents lower at $48.54, while Lender
Processing was 15 cents lower at $34.66.

For now, Fidelity must chart out a path forward, where it
can prove growth on its own is better than selling out.

Buying back shares cheaply is a good use of proceeds when a
company doesn’t have an acquisition target, one source familiar
with the situation said, and Fidelity’s decision is a signal to
the market that it thinks its stock is undervalued.

Stocks

(Additional reporting by Emily Flitter, editing by Gerald E.
McCormick)

DEALTALK-Fidelity National’s bet on buyback looks viable