Fidelity in Deal with Bradesco - Analyst Blog

Electronic payment processor, Fidelity National Information Services Inc. (FIS) announced the signing of a deal or a memorandum of understanding (MOU) with Banco Bradesco (BBD), a Brazilian card processing bank.

Under the 10-year deal, Fidelity Processadora e Servicos S.A (FPS), Fidelity’s Brazil-based card processing services company, will provide card processing, call center, collection and back-office services for Banco Bradesco’s private label and bank card portfolios. Financial terms of the deal were not disclosed.

Fidelity Processadora e Servicos S.A., a three-way joint venture among Fidelity, Banco Real and Banco Bradesco, provides a broad range of card processing and support services including call center management, back-office support, card transaction processing, risk management and collection services in Brazil.

To spur growth, Fidelity had formed a joint venture with leading banks in Brazil to provide end-to-end outsourced credit and prepaid card processing services to Brazilian card issuers.

With this deal, Fidelity will maintain its existing 51% in the joint venture and increase Banco Bradesco's ownership to 49%. Additionally, the company also pointed out that Banco Santander will exit the joint venture.

Fidelity has been expanding its offshore presence and broadening its footprint in Brazil with its back-office outsourcing and item processing operation, which has been named Fidelity BPO Brazil. The company has won a few contracts in the area to support its growth strategy.

We believe Fidelity BPO Brazil will offer cross-selling opportunities between the company’s card processing and item processing clients as well as a more complete service offering to other financial institutions.

The company currently processes over 13 million Bradesco cards on its Brazilian processing platform and with this current deal it plans to complete the conversion of Bradesco’s 14 million bankcards during the fourth quarter of 2010, bringing the total number of cards processed on behalf of all FPS clients to more than 40 million.

Fidelity has also been expanding its card and payment processing scale in Australia, Brazil, New Zealand and Thailand. Fidelity is also the number one core processing provider in Europe and China and the number one retail core processor in Germany.

Going forward, the company plans to focus on tier 1 and 2 banks in Western Europe and EMEA and expand its payment processing business throughout Asia and Latin America. The company has nine domestic and four international technology centers and has relationships with more than 75% of the U.S. financial institutions, which makes it one of the preferred financial institution service providers.

In the most recent quarter (second quarter 2010), Fidelity’s International Solutions revenues totaled $200.7 million, up 8.0% year over year and 3.1% in constant currency. The strong results were driven by higher volumes from its Brazilian card processing operation. However, EBITDA margin was 18.1% compared with 19.4% in the prior-year quarter. The decline was primarily due to delays in converting the Bradesco portfolio.

In the card issuer services market, Fidelity’s competitors include MasterCard Incorporated (MA) and Visa Inc. (V) as well as third-party credit and debit card processors such as First Data Corporation, Total System Services Inc. (TSS), Electronic Data Systems Corporation and Payment Systems.

However, the definitive agreement with Banco Bradesco will likely enable Fidelity to expand its Brazilian operations. In our opinion, such a deal will be beneficial for Fidelity on a long-term basis. This deal will support its international growth objectives, driving the top-line growth going forward. New deal signings will help Fidelity to attain its growth target over the long term.

Currently, Fidelity has a Zacks #3 Rank, which implies a short-term 'Hold' rating (for the next 1-3 months). Over the long term, we have a Neutral recommendation on the stock.

 
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