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When you think of “payments,” your mind probably jumps to PayPal (NASDAQ: PYPL), and for good reason. It just went public, and with a $44 billion market cap it’s nearly as big as Netflix (NASDAQ: NFLX). But PayPal’s biggest rival might soon be hitting the public markets.
First Data Corp. is one of the more underrated payments processors in the market. The company, currently owned by private equity firm KKR & Co. as a result of a 2007 leveraged buyout, may be coming back to the public markets very soon. KKR paid $29 billion for the company nearly a decade ago.
First Data filed for an initial public offering a couple weeks ago. With a debt load exceeding $20 billion, it plans to use the IPO proceeds to pay off some of its obligations. Meanwhile, PayPal has less than $1 billion in debt.
But First Data has been working on shoring up its balance sheet. Last year it completed a private placement funding round to raise money for paying down debt. It also refinanced some of its term loans to reduce its interest rate.
Plus, First Data has over $5 billion in total assets. A couple of quarters ago, it reported its first profitable quarter since it was bought out in 2007. And don’t forget that the IPO proceeds will likely go toward paying down debt.
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Valuation-wise, First Data could come to market with a market cap of around $30 billion, based on where other payments companies are trading. That also assumes that it will trade at a price-to-sales ratio that’s half that of PayPal.
The Beauty of the Business Model
The core of First Data’s business is its debit card and bank card network for processing transactions. Although it’s a relatively unknown player in the payments business, it’s actually the largest. It processes nearly half of the credit and debit card transactions in the U.S.
But what about future growth? First Data’s business isn’t all that sexy, but it’s slow and steady. The transition away from cash to card spending has been constant, and it’s a broader trend that should start to catch on in overseas markets over the next decade.
PayPal can buy growth thanks to its clean balance sheet. Hence its recent $890 million purchase of money transfer company Xoom Corp. (NASDAQ: XOOM). But there’s innovation to drive growth at First Data. The company is involved with the technology behind Apple’s (NASDAQ: AAPL) mobile payments platform, Apple Pay. And the security technology that First Data has developed can easily be extended to other mobile payments systems.
Apple Pay is still young, but the growth opportunities are there, with the likes of Whole Foods (NASDAQ: WFM) and Panera Bread (NASDAQ: PNRA) already implementing it. First Data will be a key player in rolling out Apple’s mobile payment tech to merchants across the globe, making it an indispensable partner.
There hasn’t been much hype about the First Data IPO, which isn’t a bad thing. It’s quite possible that the company’s IPO will fly under the radar and avoid the feeding frenzy we’ve seen with many other companies that have recently come to market. Thus, First Data could be worth owning when it starts trading later this year.