Analysis: First Data's new CEO faces debt burden, needs growth

Reuters News
Posted: Apr 30, 2013 1:36 PM

By Greg Roumeliotis

NEW YORK (Reuters) - First Data Corp's new chief, Frank Bisignano, said he can tackle the world's largest payment processing company's roughly $24 billion debt burden by boosting profits and positioning it for an initial public offering. But the former JPMorgan Chase & Co executive has a tough task ahead.

First Data, which KKR & Co LP bought for $29 billion in 2007, has been in the red consistently over the past six years as interest payments on the debt exceeded profits. On Tuesday, First Data again reported a quarterly loss, largely due to $469 million in interest expenses.

KKR, which has seen the value of its investment fall to 70 cents on the dollar, has tried to reduce the debt level and win more time to repay the debt.

Before Bisignano took over as CEO on Monday, First Data considered selling its financial services business to pay down part of the debt, three sources familiar with the situation said this week. The business consists of its credit, debit and retail card processing services and could be valued at between $4 billion to $5 billion, they said. First Data was seeking up to $6 billion for the business, one source added.

But in the last few days, First Data's bankers at Goldman Sachs Group Inc have told interested parties that the company is no longer interested in a sale, the sources said.

Instead, KKR is betting on Bisignano, a 53-year-old executive who has made a name for himself on Wall Street as a troubleshooter, to steer a turnaround. In an interview late Monday, he said there were synergies between First Data's divisions and that he does not see a reason for breaking up the company.

"Over time, there is going to be capital structure change. We will talk about the future. If that's an initial public offering, that's what we'll do," Bisignano said. "What we are working on today is getting the company to perform as it has in the past, continue to work on it, and the rest will take care of itself."

A First Data spokesman said the company is not carrying out a sale of any of its businesses, while KKR and Goldman both declined to comment.

First Data's troubles highlight how private equity firms such as KKR are still dealing with expensive mistakes from the heady days of leveraged buyouts.

The deal, one of the largest leveraged buyouts ever, seemed like a good bet at the time. The company's technology allows payments to take place at millions of locations through thousands of card issuers. Its peers include Vantiv Inc and Global Payments Inc.

But underlying profits were overwhelmed by the enormous amount of debt KKR put on the company to fund the buyout.

Other high-profile leveraged buyouts that have run into problems include the acquisition of Chrysler Automotive by Cerberus Capital Management LP and the takeover of Channel Communications Inc by Bain Capital LLC and Thomas H. Lee Partners LP.

KKR itself is engaged in another high-stakes battle to save its investment in Energy Future Holdings, a Texas utility it acquired with TPG Capital LP and Goldman's private equity arm for $45 billion in 2007, in the largest leveraged buyout ever.


Bisignano, a New Yorker, helped Citigroup Inc find office space for its employees after the September 11, 2001 attacks, relocating 16,000 workers displaced by the loss of 1.3 million square feet when the 7 World Trade Center building was destroyed. He has retained his reputation for fixing problems ever since.

He also has a rolodex full of contacts valuable to First Data. Between 2002 and 2005, Bisignano was the head of the global transactions services business at Citi and grew it to $6 billion in annual revenue from $4 billion.

At JPMorgan, which he joined in 2005, Bisignano was given the task of repairing its home-lending business after mortgages were acquired through the bank's acquisitions of Bear Stearns and Washington Mutual.

Among other high-profile roles, he helped to negotiate JPMorgan's Canary Wharf property in London while battling throat cancer. Before his departure from JPMorgan, he was seen as a possible successor to CEO Jamie Dimon.

Bisignano has time to turn around First Data. The company has extended the bulk of its debt maturities to 2016 and beyond.

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Last month, credit rating agency Fitch Ratings said First Data is heavily tied to consumer spending, which has been hurt by higher U.S. taxes in 2013 but could benefit over the next few years if inflation picks up, boosting the value of its processed transactions.


Meanwhile, Bisignano will need to figure out ways to squeeze more profits out of First Data's three business segments.

"First Data continues to do a nice job of extending debt, amending debt, and lowering interest costs. Unfortunately, the one thing it has not done is reduce debt - it still sits on more than $22 billion. So despite the anticipated slight improvement in EBITDA in 2013, leverage is likely to hover near 10 times," Gimme Credit senior analyst Dave Novosel wrote in a note on Tuesday.

First Data on Tuesday reported a 2013 first-quarter net loss of $337 million, up from a loss of $185 million a year ago.

The financial services business had earnings before interest, taxes, depreciation and amortization (EBITDA) of $133 million, down 15 percent from the first quarter of 2012. Its retail and alliance services segment, which enables stores to accept credit and debit cards, reported a 1 percent rise in EBITDA to $354 million. Its international segment EBITDA rose 5 percent to $$100 million.

Bisignano said he was looking forward to his new job.

"I'm the CEO of a fabulous company. It's been a lifetime dream," he said. "My friends and mentors, everyone I have spoken to has said what a great fit for me this is."

(Removes extraneous 2008 date in paragaph 13)

(Reporting by Greg Roumeliotis in New York; Additional reporting by Jessica Toonkel and Soyoung Kim in New York; Editing by Paritosh Bansal and Jeffrey Benkoe)