(Reuters) – Fidelity National Information Services Inc (FIS.N) agreed to buy Metavante Technologies Inc (MV.N) for about $2.94 billion in stock, to create the world’s largest provider of integrated payment and financial processing services.
“While FIS will benefit from Metavante’s strong footprint in the U.S. and solid reputation for tightly integrated products, FIS will grant Metavante with greater exposure to the overseas markets it has been striving to penetrate,” said Christine Barry, research director at Aite Group.
Macquarie Securities analyst John Williams wrote in a note to clients that Metavante’s payments business — which includes the NYCE debit network, bill payments, healthcare and imaging businesses — is clearly the key driver of future growth and Fidelity intends to capitalize on it.
As per the deal, Metavante shareholders will get 1.35 shares of Fidelity stock for each share they own. The offer is at a premium of 23 percent over Metavante’s closing price of $19.96 on Tuesday.
Metavante shares rose as much as 13 percent while Fidelity National shares fell close to 6 percent in morning trade, following the news.
In a regulatory filing, Metavante said it expects the combined company to report 2009 adjusted earnings of $1.80 a share.
The combination is expected to lift long-term organic revenue by 2 percent, Metavante said in the filing. In 2008, the two companies generated combined pro forma revenue of $5.2 billion.
“There’s an awful lot of costs that can come out between the two organizations,” Fidelity Chief Executive Lee Kennedy said in a conference call.
Metavante, which was a unit of Marshall & Ilsley Corp (MI.N) before it was spun off in 2007, said it expects cost savings of about $260 million from the combination by the end of 2012, of which $210 million will be achieved by 2010.
Fidelity also said it will maintain the dividend of 20 cents for all shareholders as part of the transaction.
Fidelity’s Metavante acquisition could be about building scale to keep future competitors at bay, particularly technology companies, which may be keen to challenge the company on its own turf.
“I think the bigger point we are making is it’s not the competition we have today that we should be concerned about. It’s the competition we could have tomorrow,” a company executive said on a conference call. “And that’s what we have to be ready for.”
The company said it expects some of the larger players like International Business Machines Corp (IBM.N) to enter this space in a big way.
However, Macquarie’s Williams believes that Fidelity has cut the deal to add Metavante’s attractive customer base to its own and strengthen its competitive position against Fiserv Inc (FISV.O).
Fidelity said it would issue about 162 million shares to Metavante shareholders.
An equity investment made by affiliates of Thomas H. Lee Partners L.P. and Fidelity National Financial Inc (FNF.N) in the acquiring company will result in about 16 million additional newly issued shares.
The company expects to receive $250 million from the new issue which will be used to pay down Metavante’s debt by $400 million.
Metavante’s largest shareholder Warburg Pincus, which owns 25 percent of its stock, will be the largest shareholder of the new company with about 11 percent ownership.
Fidelity’s shareholders will have a 52 percent stake in the combined company, while new equity investors will have a 4 percent holding. Metavante shareholders will own the rest of the company.
The combined entity will have $3.8 billion in debt, $1.45 billion of which is related to the acquisition, Metavante said in a filing.
The pro forma enterprise value of the combined company is about $10 billion, the companies said in a joint statement.
Fidelity said it had agreed pay a break-up fee of $175 million.
Shares of Fidelity were trading down $1.15 at $17.05 and Metavante shares were trading up $2.24 at $22.20 in afternoon trade on the New York Stock Exchange.
By Supantha Mukherjee
(Editing by Dinesh Nair, Anil D’Silva)