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ETFs to Tap on Fiserv-First Data Deal

Zacks Equity Research
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Fiserv FISV, a U.S. financial technology provider will be acquiring payment processor, First Data Corp FDC for $22 billion, in what would be one of the largest acquisitions in the promising fintech sector. Fiserv will assume the New York-based company’s $17 billion of net debt that are present since the leveraged buyout, led by private equity firm KKR & Co Inc in 2007.

The two combining entities provide a range of technology-related services to banks, merchants and other institutions involved in the business of moving money. While Fiserv is known for processing credit and debit card transactions for banks, First Data handles the merchant side of the proceedings.

Inside the Deal

The all stock-deal is at a premium of about 30% to First Data’s closing price on Jan 15.  However, analysts are much more bullish on First Data and expect the stock to gain about 50% over the next 12 months. The company has earned $1.8 billion in the latest reported 12-month period.

The new company will be known by the name Fiserv. Fiserv shareholders will own 57.5% of the combined company and First Data shareholders will have the remaining stake. KKR, presently holding 39% stake in First Data’s common stock, will hold 16% of the combined company and receive a board seat. KKR invests in and partners with industry-leading franchises and companies poised for significant improvement or growth.

Fiserv will be offering 0.303 of its shares in exchange for each First Data share. Per Bloomberg’s merger calculator, earnings per share for Fiserv is likely to shoot up by 15% next year, even before the synergistic effects.

First Data looked a very attractive option for takeover purposes, given a sharp drop more than 30% from an all-time high in September 2018. Also, First Data was seeking to reduce its debt burden and improve profitability as its net debt to adjusted trailing 12-month EBITDA ratio was 5.3 at the end of the third quarter.

Cost savings are pegged at $900 million over the coming five years. Fiserv will refinance the debt borne by First Data at the close of deal, being one of the ways that the combined entity will save money. The deal is expected to close in the second half of the year (read: Winning ETF Strategies for 2019).

The merger is likely to create a formidable competitor in the fast-growing payments-processing business. Big banks like Bank of America Corp (BAC) and Well Fargo & Co. (WFC) have collaborated with First Data for providing merchant services to their commercial banking clients.

ETFs to Tap

The announced merger has put the spotlight on the following ETFs that provide a considerable amount of exposure to Fiserv and First Data. So, investors wanting to tap the growing fintech sector could bet on the following ETFs (see: all the technology ETFs here):

Global X FinTech Thematic ETF FINX

The fund tracks the Indxx Global FinTech Thematic Index. It invests in companies that are on the leading edge of the emerging financial technology sector, which encompasses a range of innovations helping to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions. The fund provides a combined exposure of 11.25% to Fiserv and First Data. It has AUM of $264.6 million and expense ratio is 0.68%. The fund has returned 7.4% over the past four weeks (as of Jan 16).

ETFMG Prime Mobile Payments ETF IPAY

The fund tracks the Prime Mobile Payments Index, which provides a benchmark for investors interested in tracking the mobile and electronic payments industry, specifically focusing on credit card networks, payment infrastructure and software services, payment processing services, and payment solutions. It provides a combined exposure of 7.6% to Fiserv and First Data. The fund’s AUM is $345.1 million and expense ratio is 0.75%. The fund has returned 7.2% over the past four weeks (as of Jan 16) (read: Risk-On Trade is Back: ETFs That Gained the Most).

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