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Fidelity Divests Healthcare Biz

FIS FISV

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Global payment solutions provider Fidelity National Information Services Inc. (FIS - Analyst Report) has wrapped up the divestiture of its Healthcare Solution business to Lightyear Capital, a private equity firm, for $335 million. Fidelity expects to receive $220 million in net proceeds after tax from the sale.

Fidelity’s healthcare solutions business comprised the Consumer Driven Healthcare Solutions and Health and Financial Network Solutions segments, catering to consumers, healthcare providers and payers by providing services in the form of benefits administration, account processing and payment fulfillment.

Fidelity’s move to sell the business accentuates the fact that the company wants 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 globally.

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”). Incidentally, the divested business was a part of PSG.

In the recently concluded quarter, FSG revenue climbed 9.1% year over year to $563.4 million (7.8% organically) on the back of growth in account processing and higher services revenue. However, PSG revenue increased marginally to $630.6 million.

The divested business was categorized as discontinued operations and negatively impacted the earnings per share by 2 cents in the last concluded quarter. The company lowered its fiscal 2012 earnings guidance by approximately 7 cents, but it is expected that fiscal 2013 results will not be impacted by the sale of the business.

We believe that Fidelity’s commanding position in the financial services market, its 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).

Moreover, FIS expects the second half of 2012 to be much more challenging in terms of margin expansion due to planned client deconversion, tough year-over-year comparisons and a lack of visibility around its Visa pricing plans.

Currently, Fidelity has a Zacks #4 Rank, which implies a short-term Sell rating (for the next 1-3 months).

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