A Prosperous Comdata Could Have an Independent Future

It's a classic corporate case of the tail wagging the dog. In particular, it's Comdata Corp., a payment processor and prepaid and fleet card provider that generates more than half the profits of its parent company, Bloomington, Minn.-based Ceridian Corp., even though it accounts for only 30% of the revenues. New York City-based hedge fund Pershing Square Capital Management L.P., which owns 11% of Ceridian, wants to increase shareholder value by splitting Comdata off from Ceridian's larger but less-profitable businesses of payroll processing and other human-resources services. Pershing's founder and president, William A. Ackman, has submitted a slate of eight candidates for nomination to Ceridian's board of directors at the company's next annual meeting. Pershing's concerns clearly have caught the eye of Ceridian's new president and chief executive, Kathryn V. Marinello, and her board. On Feb. 13, Ceridian said in a news release that it had hired an investment banker, New York City-based Greenhill & Co., and a law firm “to explore a broad range of strategic alternatives to enhance shareholder value.” At the company's fourth-quarter earnings analyst conference call that day, Marinello said she would not talk about specifics of the review, nor about some acrimonious letters exchanged between Ackman and Ceridian. The dust-up raises the specter of another processor going its own way in an industry that includes giants such as First Data Corp. and TSYS Inc. but also has room for practically any processor that can find a profitable niche. Comdata, which has a long-established franchise in fleet cards and payment services for truck stops, has expanded rapidly into gift and prepaid cards, and is using the platform of an independent sales organization it bought in 2005 as the foundation of a full-blown suite of merchant-processing services (Digital Transactions News, Sept. 27, 2006). With all that going on, one veteran payments consultant sees Comdata as having little difficulty making it on its own. “Should that happen, it would only be a minor hiccup at the most,” says David Lott, senior vice president at Atlanta-based Speer & Associates Inc. “They've been very successful; they could operate very easily as a standalone company.” Apart from sharing some administrative overhead, “there's not a lot of synergies between the Ceridian HR side and the Comdata side,” Lott adds, noting that Comdata's headquarters in Brentwood, Tenn., is hundreds of miles from Ceridian's head office. In the fourth quarter, Comdata generated $121.3 million in revenues, up 15.9% from a year earlier, compared with $282.7 million for the human-resources segment, up only 2.9%. Comdata posted pre-tax earnings of $40 million, up 16.3%, compared with $36.4 million for human resources. While the human-resources segment's profits grew nearly 84% thanks to cost cutting and other measures, that business is still much less profitable than Comdata. Comdata's earnings before taxes and interest were 33% of segment revenues in the fourth quarter compared with 12.9% of segment revenues for human resources.