In a move intended to expand its role in the payments industry and provide a new stock for acquisitions, Fidelity National Financial Inc. has agreed to combine its technology unit with the transaction processor Certegy Inc.
William P. Foley 2d, Fidelity National's chairman and chief executive, said in a conference call Thursday that the deal would be structured as a merger and create a publicly traded company majority-owned by Fidelity.
The Jacksonville, Fla., banking technology and title insurance provider has long said it was undervalued by the market, and it has been mulling various plans for Fidelity National Information Services Inc. for more than a year.
In May 2004 Fidelity said it would spin off the technology unit in a public stock offering, but it put that plan on hold after buying the core processor InterCept Inc. for $408 million in September of that year. In December it sold a 25% stake in Fidelity National Information Services to a pair of private equity companies but said later that it had not ruled out an IPO for the unit.
Mr. Foley said Thursday that the Certegy deal would accomplish that and more.
"We have considered an IPO of FIS over the past 12 months, and this will help us move more quickly to achieving our goal of maximizing the value of FIS," he said. "This is a way to take care of our IPO and get a payments business."
The Fidelity technology unit is a major provider of back-end processing services to banks and credit unions, especially core processing, mortgage servicing, and check processing, but it has few payments offerings. Mr. Foley said Certegy's payment processing business "fills a significant gap in our product line."
Lee Kennedy, Certegy's chairman and chief executive, said on the call that the combination has strong cross-selling potential.
Certegy, of St. Petersburg, Fla., has about 5,700 community banks and credit union customers and FIS has about 1,700. Only 683 are customers of both companies. Merging Certegy's credit card processing capabilities with Fidelity National Information Services' core processing would create "an end-to-end processing solution" and, in turn, "a great long-term opportunity."
The combined company will still be called Fidelity National Information Services Inc. It "would have the No. 1 or No. 2 position in all the markets it serves," Mr. Kennedy said: payment processing, banking software and services, and providing outsourcing services.
The Certegy name would disappear under the tax-free, stock-for-stock merger, which must be approved by Certegy shareholders. Certegy shareholders would receive one share in the new entity for each Certegy share, and Certegy is to issue them a cash dividend of $3.75 per share.
Certegy plans to issue an additional 132 million shares of its stock to current shareholders of Fidelity National Information Services, which is not publicly traded. (The private equity companies with the 25% stake are Thomas H. Lee Partners LP of Boston and Texas Pacific Group of Fort Worth; the rest is owned by Fidelity National.)
The deal is expected to close late in the fourth quarter. Certegy shareholders would own about 32.5% of the combined company and Fidelity National Information Services' owners would own the rest. Fidelity National would control 50.3% of the company.
Mr. Foley said he does not plan to distribute this stake to Fidelity National shareholders because that would be a taxable transaction. He also said the combined company's stock, which would trade under the symbol FIS, would give him "a new currency," presumably for acquisitions.
Al Stinson, Fidelity National's chief financial officer, said current run-rates indicate the combined company would have revenue of about $4 billion and earnings of $1 billion before interest, taxes, depreciation and amortization.
Mr. Foley would be the chairman and Mr. Kennedy the CEO. Both companies would have four board seats, and Thomas H. Lee Partners and Texas Pacific would get one seat each.
Robert Hunt, a senior analyst with the market researcher TowerGroup, a unit of MasterCard International, said combining core and card processing is a good move. The transaction processing and core processing industries "grew up separately" and few of Fidelity National's competitors offer card processing services, he said.
"There is going to be a tremendous cross-sell opportunity for selling Certegy's services into the existing Fidelity client base, and for selling Fidelity's services to Certegy's," Mr. Hunt said. "If you look at the universe they serve, there is very little overlap."
Because Fidelity National will be the majority owner, it would essentially be taking over Certegy without the hassle of an acquisition, Mr. Hunt said. "They are combining two transactions into one," he said. "They get the benefits of a spinoff, and accomplish another acquisition."
Dan Schatt, a senior analyst with the Boston market research company Celent Communications LLC, agreed that the two companies are a good fit. He also said that connecting a bank's core system with a processor's links to billers and retailers could eventually lead to enhanced online banking and bill-payment offerings, such as real-time payments. "You don't see too many companies that can take on card issuing and provide core processing as well," he said. "This is a deal with a lot of synergies."
Wall Street seemed to think well of the deal. Fidelity National's stock closed Thursday at $43, up 8.15%, and Certegy closed at $38.80, up 15.48%.
