fdc investment overivew 10315 rlc

First Data Corporation

(Ticker: “FDC” - NYSE)

Investment and Valuation Overview

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10.6.15

“Confidential”

r.coleman

Columbus Advisors Group

For Equity Syndicate Use Only

Banks: Citi/MS/BAML/KKR

Valuation Summary Assessment – Based on the mid-point “FDC”1 is priced at “full” valuation vs. my peer group2 (considered EBITDA multiples and DCF). We would expect the deal to price at the low-end of the price range (possibly below) given the company’s, “distressed” finances3, investor sentiment, integration risk, and the widening of credit spreads in the corporate bond markets (HY market is for all practical purposes, closed…). Although not clear what the investment is, FDC’s global aspirations takes the company to Brazil4, not a favorite destination given the political and economic uncertainty. These issues are partially mitigated by the company’s market position, generally solid management and FCF generation.

Assuming “normal” market conditions I anticipate a +30% total return or target price of $18.20/sh (indicating at $14/sh). Post IPO, the “equity” cushion (~$16.7B5 at mid-point) will assist the company in future acquisitions (more dry powder) and repricing or restructuring of FDC’s debt. Note that FDC has distributed nearly ¾ of $1B to shareholders (FDH – Parent Company) in the last three years.

While the company has scale and cash flow visibility, growth prospects are considered “average,” competition is “above average,” and the balance sheet is “leveraged” (product of an LBO – KKR). Fundamentally, this is a “major” risk transfer, as proceeds are being used for debt reduction vs. capital investment. As a group “Business Services” (see attached exhibit) has “significantly” outperformed the broader market +8.86% (+870 bps) vs. -.54% for the S&P. A direct competitor GPN, is a standout at better than +65% (as of 10/9/15). We expect this trend to continue

Financial Model Results (Price: $19/sh MP) EBITDA Multiple

Metric FYE 2015* FYE 2016 FYE 2017

1 Proforma the IPO, “FDC” (“KKR will “beneficially own” 73% of the equity 2 GPN, TSS, FIS, DFS 3 FDC Credit Family: Senior Secured Notes (1st Lien) to Secured Toggle Notes (Second Lien) are rated from B1/BB- to Caa2/CCC-; Based on 2015F FCF it will take FDC > 21 years to pay off its debt; working capital management needs work as it takes nearly 100 days to collect receivables; a significant amount of assets are “encumbered” via the company credit facilities 4 Management targeting 3-4% market share or $300-400MM revenue take 5 We do acknowledge that the company has a significant NOL position, and as such cash taxes will be minimal near-term




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EV / Sales 2.9x 2.65x 2.42x

EV / EBITDA 12.34x 11.05x 9.93x

FDC produces a FCF Yield of 7.2% in our forecast. However, leverage remains near 5.5x

throughout. We would not expect the company to secure an “investment grade” rating as

management plans future roll-ups. However, some improvement in the rating (say B+) would be expected. The coming end of quantitative easing elevated “refinancing risk.”

DCF Analysis

Our DCF analysis produced a FV target of $14.91/sh. (11.3% WACC). We forecast mid-to-high single-digit revenue growth and margins consistent with history. We also incorporated the

company’s significant NOL position.

Earnings Quality – Earnings quality is quite good. Also, we were impressed by the incorporate of the “Internal Control Review” and opinion. Historical and Forecast Cash Flow Production – Historically, FDC has produced “positive” FCF, producing requisite cash flow to finance necessary investments to stay competitive. However, the cash flow is “significantly” leveraged. Less so with the IPO.

Why We Like the Offering - Use of Proceeds – To partially repay bank loan debt (though we would prefer

the cash be reinvested in the business). - Economies of Scale – FDC is the world’s largest “merchant” processor (widely

respected in the industry) with an annual run-rate of $12B and FCF of $700MM LTM 2014. Such scale affords the company attractive operating leverage and cash flow for investment.

- Diversity – Top 10 customers account for 10% of revenue (majority of revenue under multi-year contracts)

- Financial Profile/Visibility – Historically positive FCF generation with decent visibility. However, given the taxing fixed income obligations, “modest” deleveraging expected. The company’s bond could be upgraded within the next 12-24 months.

Earnings and Cash Flow Vulnerabilities

Cash Flow Vulnerability Probability Impact

Control / Corporate Governance6 High High

Financial and Refi. Risk7 (52% of debt is “Libor-based”) High HIgh

6 Proforma the IPO, “KKR will “beneficially own” 73% of the equity (B shares, 10 votes/sh). Note that effective with the IPO, KKR’s management agreement is terminated at “KKR’s’” option. If terminated, KKR is paid the PV of the remaining revenue stream (seems a bit one-sided) 7 FDC has $2.8B in debt to refinance in 2018




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10.6.15

“Confidential”

r.coleman




Integration and M&A Risk Average HIgh

Holding Company Risk8 and Double-Leverage Average HIgh

Economic Growth Average Average

Competition High Average

Inflation Risk / Raw Materials High Average

Business Overview First Data sits at the center of global electronic commerce. They believe they offer their clients the most complete array of integrated solutions in the industry, covering their needs across next-generation commerce technologies, merchant acquiring, issuing, and network solutions. They serve their clients in 118 countries, reaching approximately 6 million business locations and over 4,000 financial institutions. They are the largest merchant acquirer, issuer processor, and independent network services provider in the world, enabling businesses to accept electronic payments, helping financial institutions issue credit, debit and prepaid cards, and routing secure transactions between them. In 2014, they processed 74 billion transactions globally, or over 2,300 per second, and processed 28% of the world’s e-commerce volume. In their largest market, the United States, they acquired $1.7 trillion of payment volume, accounting for nearly 10% of U.S. GDP last year.

8 Cash flow upstreamed to parent to pay dividend and represent the source of “value-creation.”




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10.6.15

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fdc investment overivew 10315 rlc

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