FIS Analyst Thinks Merchant Business Spin-Off Could Optimize Capital Allocation

Stephens & Co analyst Charles Nabhan reiterated Fidelity National Information Services, Inc FIS with an Equal-Weight and an $80 price target.
FIS is planning a tax-free spin-off of its Merchant division, acquired in 2019 for $43 billion.
While the spin-off could optimize capital allocation and create a more streamlined organization, it could also lose synergies with Banking (the rationale for buying Worldpay).
The analyst estimated a standalone value of $25 billion or a discount to historical medians for current and legacy payment peers.
The discount reflected the underperformance of volumes vs. networks and peers, based on geographic concentrations in the U.K. and a subscale presence in SMB, where it has lost share to providers like Toast, Inc TOST and Stripe.
While the company has gained traction with Payrix, the business remains in the early stages of penetration and has largely been offset by losses in the legacy ISV and ISO business.
Ultimately, the analyst views the strategic review as a step toward creating value but believes a spin-off could also be lengthy and complex in nature, given the global scale of the business.
FIS maintains one of its peer group's highest variable debt concentrations and carries ~$2 billion in upcoming maturities.
In addition to the $500 million Enterprise Transformation program, the analyst believes strategic divestitures could optimize the capital structure and provide flexibility to the allocation strategy, which would prioritize share repurchases over M&A.
The analyst saw 4Q results as a near-term catalyst as he awaits updates on the review and evidence that '23 estimates are achievable.
Price Action: FIS shares traded lower by 13.54% at $65.22 on the last check Monday.

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