Financial-services sector seen ripe for buyouts

By Jessica Hall

PHILADELPHIA (Reuters) - With the financial sector already among the busiest for mergers, private equity firms and other buyers are looking deeper at behind-the-scenes payment processors and business-services providers as takeover targets, analysts said on Tuesday.

This week alone, Kohlberg Kravis Roberts & Co. KKR.UL said it would buy First Data Corp. FDC.N, which processes credit card payments, for $26 billion, while Wisconsin bank Marshall & Ilsley Corp. (MI.N) announced on Tuesday it would separate its payment-processing unit, Metavante Corp.

Private equity firms Bain Capital and Blackstone Group BG.UL are also among the bidders for Ceridian Corp. CEN.N, which owns payment-processing business Comdata, sources familiar with the situation said last week.

"The payment-processing technology area is attractive because it has stable cash flows, and there is capacity for buyers to add more debt. That's the classic LBO (leveraged buyout) scenario, though buyers will have to accept lower credit ratings," said Richard Hofmann, a financial services analyst with CreditSights Inc.

"Payment processing is a growth area as consumers move further away from cash, and payments become increasingly electronic and automated," Hofmann said.

Shares of Marshall & Ilsley rose 8.7 percent to $49.83 on Tuesday ahead of the confirmation of Metavante's separation. Private equity firm Warburg Pincus WP.UL will buy 25 percent of Metavante for $625 million, Marshall & Ilsley said.

"It's obvious that investors are looking at this area from an M&A perspective," said Scott Kessler, head of technology sector equity research at Standard & Poor's.

"Six to 12 months ago, these companies might have been satisfied to operate their businesses. But it's clear that buyers and investment bankers are looking at whether the businesses have unrealized value," Kessler said.

"If the companies aren't getting the message given the performance of their rivals' stocks, certainly shareholders are communicating it to them," he added.

FINANCIAL FEEDING FRENZY

The financial services sector was the third-most active for mergers in the first quarter of 2007, according to research firm Dealogic.

The focus on services may have begun as long ago as 2005, when a private equity group bought financial-technology firm Sungard Data Systems, Kessler said. The trend was further stoked in December 2006, when Bank of New York Co. (BK.N) announced its $16 billion purchase of Mellon Financial Corp. MEL.N, analysts said.

Together, Bank of New York and Mellon would move ahead in the unglamorous business of tracking trades, holding trillions of dollars in securities in custody and calculating the bulk of mutual fund prices that national newspapers print daily.

Now, with the latest First Data and Metavante deals, Lehman Brothers analyst Jason Goldberg said the pressure would likely mount for Synovus Financial Corp. (SNV) (SNV.N) to unload its majority stake in payment-services company Total System Services Inc. (TSS.N).

"Ever since TSS announced it lost BAC (Bank of America) as a major consumer processing customer in late December, 2005, SNV began more openly discussing the possibility of cutting its TSS stake," Goldberg said in a research report.