First American Payment Auction Busted Due To Unrealistic Sale Expectations

Despite the bubbling M&A market, unrealistic expectations can still destroy an auction.

Consider First American Payment Systems. The Fort Worth, Texas-based company, which is owned by Lindsay Goldberg, provides credit, debit and other electronic payment processing services to more than 120,000 merchants. First American had about $211 million of revenue in the 12 months ended Sept. 30, according to Moody’s Investors Service.

Earlier this year, First American hired Citadel to advise on its auction. The company has about $50 million EBITDA and was seeking bids of 12x, five banking and PE sources say. Several buyout shops—believed to include General Atlantic, TA Associates, Bain Capital, TPG, KKR and Warburg—put in proposals, sources say.

“We couldn’t get into next round with what I thought was an extremely high bid,“ says one buyout exec.

In the past month, roughly a dozen prospective bidders walked away from the auction after conducting due diligence. First American went out with “very unrealistic value expectations,” a banker says.

“It’s a nice business but it’s not worth 12x EBITDA,” the source says.

Lindsay Goldberg, which acquired First American in 2003, has pulled the sale, persons say. Now that the auction is busted, First American is in the market for a loan of roughly $225 million. About $135 million will be used to pay a dividend to shareholders, including Lindsay Goldberg. Moody’s Investor Service, this week, assigned a first-time corporate family rating of ‘B1’ with a stable outlook to First American.

The company will have an aggressive financial risk profile following the dividend recapitalization, with adjusted debt (including the present value of operating leases) to EBITDA of about 4.5x, according to Standard & Poor’s. However, First American’s outlook is stable as S&P expects First American to maintain consistent revenue growth and profitability.

Unrealistic price expectations also contributed to the failed sale of iPayment, a merchant processor from Nashville, sources say. Earlier this year, iPayment hired Perella Weinberg to advise on an auction. iPayment has roughly $100 million EBITDA and was looking to sell for 9x to 10x, sources say.

Greg Daly, iPayment’s CEO, filed for bankruptcy in 2009. Daly’s situation worried prospective buyers because the CEO would likely receive a large payout if iPayment was sold. “It’s hard to know what is happening there,” a different PE exec said. “He might’ve been holding out for a bigger piece. A lot of people were worried about the dynamic.”

iPayment’s sale has been “on and off” for a while and the auction is now off. However, the company is expected to be back up for sale in the future, sources say.

The failed auctions come as the M&A market is heating up as buyers and sellers contend with different price expectations. The leverage markets have opened up somewhat and there are expectations that sales can get done. Added to the mix is a $425 billion PE overhang which is pressuring buyout shops to put their money to work.  “If the value expectations are crazy, people just move onto the next deal,” the PE source says.

However, not all deals in financial technology suffer from outsized price expectations. GTCR Golder Rauner agreed in September to sell National Processing Co. to Fifth Third Processing Solutions. The deal is expected to close in November (BofA Merrill Lynch advised the seller). While financial terms weren’t disclosed, NPC sold for more realistic multiples, lower than than 12X EBITDA. NPC benefited from having teams with experience in fintech, sources say. GTCR has done many deals in the sector and Fifth Third Processing, which is majority owned by Advent International, is also a known buyer in the space. Advent and Bain Capital are currently acquiring RBS Worldpay, the leading merchant acquirer in the U.K.

Officials for Lindsay Goldberg, First American, Citadel and iPayment couldn’t be reached for comment. Perella Weinberg declined comment.