First Data Corp., which is about to lose some utilities-billing business with its spinoff of Western Union Financial Services Inc., has struck a deal that could compensate for that loss.
Analysts said that buying Peace Software Inc. could help the processor maintain a position in the utility market and recover some of the revenue it stands to lose after spinning off Western Union, which has a bill-payment operation.
David Bailis, an executive vice president at First Data and the president of the Denver company's financial institutions division, said in Thursday's press release announcing the Peace Software deal that it "is the cornerstone of First Data's strategy to provide a comprehensive, integrated, meter-to-cash solution to the global utilities market."
First Data spokeswoman Donna Pennington said Peace is in "an adjacent market that allows us to leverage our core strengths in transaction processing." Peace, which is privately held, does not process bills, but its software helps utilities manage customer accounts and invoices.
The company is headquartered in Auckland, New Zealand, and has offices in Miami, Dallas, Canada, Norway, Australia, and the United Kingdom. Ms. Pennington said its client base was one thing First Data liked about it.
"Peace has a very good footprint globally, and that's definitely a positive in bring them into the first Data family," she said. "Existing clients are always a good thing."
Western Union offers two products, Quick Collect and Convenience Pay, that let customers make payments to a variety of billers, such as utility companies. Ms. Pennington would not say much how revenue they generate.
However, Brandt A. Sakakeeny, an analyst with Deutsche Bank, said Western Union's consumer-to-business bill-pay segment has "witnessed pretty steadily deteriorating revenue growth numbers, and it's been in trouble for the last couple of years."
In large part this is because many billers are automating their payment processes to make it easier for customers to remit payments, even at the last minute. That has led to shrinking demand for Western Union's bill-payment services, which carry a fee.
"What First Data is doing," Mr. Sakakeeny said, is buying one of the companies "that developed some of those specific technologies and strategies" that were "effectively cannibalizing" Western Union's consumer-to-business segment.
Gwenn Bezard, a research director at AITE Group LLC in Boston, said that because of the Western Union spinoff, which is expected to be completed in the fourth quarter, "First Data is going to build up a business in bill-payment services."
Peace's software is valuable, Mr. Bezard said, but the most important part of the deal is "acquiring relationships with billers."
Ms. Pennington declined to say whether the spinoff was a motivation for the Peace deal, and she would not say what First Data is spending to buy the software company. Lawrence S. Berlin, an analyst with First Analysis Securities, said the price probably will not exceed $10 million.
The utility industry is well known for being a laggard in the shift to electronic billing, Mr. Berlin said. Utility billing will be a "growth industry as we move through the rest of this decade," he said.
Buying Peace would give First Data "another area in payment processing that's certainly synergistic with what they're doing," Mr. Berlin said. "In fact we've always wondered why they haven't moved into this space sooner, where they can build out the payment processing capabilities over a long period of time."
Buying the software company will give First Data "an established presence" in the utility billing market, and it can "build from there," Mr. Berlin said.
But Gregory Smith of Merrill Lynch says First Data will probably have to make additional moves to establish itself in the utility billing market.
The leading provider of outsourced customer service and billing services for utilities is Alliance Data Systems Corp. of Dallas, which has about 10% of the market. Alliance Data "has been a nicely growing and profitable business" and has "a significant head start" over First Data, Mr. Smith said in a research note issued Thursday.
"We think Peace provides FDC with just a small piece of the puzzle and it will take time for the company to become a more viable competitor," Mr. Smith wrote. "FDC still may need to make several hires, fill in product gaps, and gain a reputation in the industry before becoming a more formidable competitor to ADS."
Timothy W. Willi, an analyst with A.G. Edwards & Sons, said the utility bill payment market is too big to ignore. "People pay on average 12 to 16 bills every month routinely, and a lot of those are utilities. You want to be involved in processing those payments - that's a lot of payments," he said.
Though utilities have been slow to adopt electronic bill payment, the overall bill-pay segment is growing rapidly, and companies that offer such services, including CheckFree Corp., are thriving, Mr. Willi said.
First Data, he said, has certainly noted the "stock performance of a company like CheckFree, when all CheckFree is doing is processing people's utility payments online". "If you're FDC, you're sitting there and saying, 'Why can't we do that? We process billions of transactions every month. We need to find a way get into the market.' "
