In announcing its somewhat surprising decision to spin off Western Union Financial Services Inc., First Data Corp. made it clear that the work of revitalizing its card businesses is just beginning.
The Denver processor's decision followed a broad internal review in which the company considered, among other things, selling its issuing-services arm. Under the plan announced Thursday, that business will remain a significant piece of First Data, though the company will likely continue to shed other business lines to focus more on cards.
Henry C. Duques, First Data's chairman and chief executive, said in a conference call with analysts Thursday that it has identified 11 other businesses that have been a drag on earnings, and that it will either fix or dispose of them.
In an interview, Mr. Duques said First Data, which bought Western Union in 1995, originally viewed it as a way to expand its payments capabilities. "We said we want to process payments. It could be a credit card payment; it could be a wire transfer payment."
But in recent years, the growth of First Data's card businesses has slowed, and Western Union's has continued to climb, he said; trying to manage these two very different operations forced First Data to reevaluate the combination.
The company thought, "Maybe we should be looking at it in a different way," Mr. Duques said, and in doing so it decided to separate its operations "into consumers and businesses" and spin off the consumer side.
First Data expects to complete the tax-free spinoff to shareholders in the second half. It also plans to reorganize its card processing businesses into three units: Financial Institution Services, Commercial Services, and International.
Wall Street welcomed the plan. First Data's stock closed up 5.35% at $45.30 a share, despite the company's dismal fourth-quarter earnings report, also released Thursday. Revenue for 2005 rose 5%, to $10.5 billion, and net income fell 15%, to $1.6 billion.
But Lawrence S. Berlin, an analyst for First Analysis Securities Corp., said the poor numbers were irrelevant, because they were "overshadowed" by the spinoff. "This quarter doesn't tell us much about the future."
When the dust settles, First Data will be forced to deal with the problems in its core card businesses. Mr. Duques said the main one has been consolidation.
About 90% of all card receivables are held by the top 10 issuers, and account growth is "in the low single digits," he said. "There was a time in our history when consolidation was in our favor; everyone that was consolidating was on our system." But now losing even a single customer can be a big hit - and First Data has lost several major ones in the past few years to Total System Services Inc.
Mr. Duques did not promise any near-term improvements. He said revenue for the card-issuing business, which will become the heart of the Financial Institutions Services division, would be flat this year and next, and profits would grow in the low single digits.
By 2008, he hopes the unit's revenue and profits will be growing by 8% to 10% annually.
Western Union was not the unit many were expecting First Data to spin off. When he succeeded Charles T. Fote as the CEO in November, Mr. Duques initiated a review of the card-issuing division, which at that time, he was considering selling.
During the interview he said that First Data never made any efforts to sell the card-issuing business, and there are no plans to do so. "It would be a monumental reversal," he said.
David M. Scharf, an analyst for JMP Securities LLC, said he "would not be at all surprised if they ran up against a brick wall in efforts" to shop the business, because "it is mature and slow-growing."
First Data was wise to set expectations low for the card-issuing business, Mr. Scharf said, because it takes "a little bit of pressure off themselves."
Still, there is no "quick fix" for that business, he warned, because consumer growth has slowed, and First Data will likely require a major technology overhaul. "It's hard to see the financial engineering announced today is really going to translate into a materially different outlook."
