Globally recognized payment solutions provider Fidelity National Information Services Inc. (FIS - Analyst Report) has agreed to divest its healthcare benefit solutions business to Lightyear Capital, a private equity firm, for $335 million in cash. Fidelity will part with the Consumer Driven Healthcare Solutions and Health and Financial Network Solutions, which cater to the consumers, healthcare providers and payers by providing services in the form of benefits administration, account processing and payment fulfillment. The company expects to complete the procedure by the end of the third quarter of 2012.
Fidelity noted that the divestiture would help it to focus on its core payment solutions and services segment for financial institutions. The leading banking and payments technology solutions provider has a strong clientele of financial institutions.
The Healthcare Benefit Solutions Business, a part of the Payment Solution Group segment, contributed $120 million to the total revenue and 5 cents per share to the adjusted earnings in fiscal 2011. As a result, the company lowered its fiscal 2012 earnings guidance by approximately 7 cents and added that fiscal 2013 results would not be impacted by the sale of the business.
Moreover, Fidelity expects the divestiture to negatively impact earnings for the upcoming second quarter by approximately 2 cents. However, the company expects to receive $220 million in after tax proceeds from the deal. Additionally, Fidelity expects approximately $55 million in after-tax GAAP losses when the sale is completed in the third quarter.
We believe that the company’s focus on the core segment of the Financial Solutions Group (“FSG”) is a prudent measure that should offset the sluggish growth in its Payment Solutions Group (“PSG”). In fiscal 2011, revenue from the FSG group increased 9.8% on a year-over-year basis while PSG was up 0.5% over the same period of time. The same phenomenon was repeated in the first quarter of 2012, where FSG revenue rose 7.0% year over year while PSG revenue increased 2.6%.
We believe that Fidelity’s commanding position in the financial services market, increasing international exposure, recurring revenue model, diversified product portfolio, cost synergies from acquisitions and loyal customer base will drive growth over the long term. We also believe that Fidelity’s expansion into emerging markets such as Brazil and Europe will drive organic revenue growth going forward.
However, increasing consolidation in the banking sector, a challenging environment for the Payments Solutions business and an uncertain regulatory environment are the primary headwinds, in our view.
We maintain our Neutral recommendation on a long-term basis (for the next 6 to 12 months), primarily due to a highly leveraged balance sheet and intense competition from other major players such as Fiserv Inc. (FISV - Analyst Report).
Currently, Fidelity has a Zacks #3 Rank, which implies a short-term Hold rating (for the next 1-3 months).