Capellas Leaves First Data As Hints of Recovery Appear on the Horizon

Michael D. Capellas, the former Compaq Computer Corp. and MCI chief executive who became chairman and chief executive at First Data Corp. in September 2007 when private-equity firm Kohlberg Kravis Roberts & Co. took the huge processor private, is taking a new position at KKR. Replacing him as chairman and on an interim basis as chief executive is Joe W. Forehand, the former chairman and chief executive of consulting firm Accenture plc. Capellas will be senior advisor at KKR, focusing on technology. He'll work with KKR's portfolio companies, including Atlanta-based First Data, as well as new acquisitions. At a news conference Thursday morning, Capellas indicated he had accomplished or was well on the way to accomplishing the major goals he set for First Data in 2007. Those included consolidating its many processing platforms and data centers, introducing new products and technology, improving customer service, and recruiting a “world-class” executive team. “This was part of a three-year plan when I got here,” he said, noting that First Data recently developed a plan for the next three years. “This is a pretty natural evolution.” Payments consultant Eric Grover, principal of Menlo Park, Calif.-based Intrepid Ventures, says First Data is on its way to having three U.S. merchant-processing platforms and two elsewhere in the world. That's still more than some rival processors, but a vast improvement from when it had more than two dozen platforms globally for merchant, credit, debit, and prepaid card processing. “It's clear they've made significant headway in the right direction,” Grover says. Forehand, a First Data director who officially takes over from Capellas on March 31, will serve as chairman for at least three years. Neither he nor Capellas said when a permanent chief executive would be named. Each executive praised the other, with Forehand saying Capellas is leaving First Data in good shape. “I'm very comfortable with the strategic framework Michael worked out,” Forehand said. Analysts at an early-morning earnings call as well as a reporter at the follow-up news conference to discuss the executive changes asked if First Data had an initial public stock offering in the works. But Forehand, who oversaw Accenture's IPO, wouldn't bite. “We don't have anything specifically in mind in terms of a time frame for an IPO,” he said. “We'll sort out the right time for an IPO.” KKR's leveraged buyout put a tremendous amount of debt on First Data's balance sheet?the company's newly filed 2009 annual report lists $22.3 billion in long-term obligations?leading to some recent press speculation about its ability to service it. An IPO would relieve part of that debt burden, but chief financial officer Pat Shannon seemed to go out of his way Thursday to point out that First Data's current cash flows are easily covering its interest obligations, which he says will amount to $1.4 billion this year. First Data also has no balance on its $1.7 billion line of credit, he added. “As of now we feel the best thing we can do for our balance sheet is to position the company for sustained earnings growth in the future, but we feel real good about our position coming out of the toughest economic environment in recent memory,” Shannon said. Retail and Alliance Services, the biggest of First Data's three main operating units and which includes its merchant-processing business, posted revenues of $820 million in the fourth quarter, flat from a year earlier but 19% above $691 million in 2009's first quarter. This January, same-store transaction volumes grew 8% and dollar volumes rose 7%. “Overall the fourth quarter was a period of stabilization for both merchants and financial institutions,” Capellas said. “In January we began to see the mixed signs of a modest recovery.” Margins remain under pressure, however, because of the shift in spending toward national retailers, which are less profitable for processors than smaller merchants, and price compression. Companywide earnings before interest, taxes, depreciation and amortization (EBITDA) were $530 million, down 18% from $645 million in 2008's fourth quarter. First Data reported overall revenues of $2.56 billion, up 12% from $2.32 billion in 2008's fourth quarter, but a net loss of $338.4 million. That was much improved, however, from a $3.18 billion loss a year earlier. First Data had some big client wins last year, most notably the new merchant alliance with Bank of America Corp. (Digital Transactions News, June 29, 2009) that already is boosting revenues, Capellas said. But on the card-issuer processing side, it lost the former Washington Mutual portfolio now owned by JPMorgan Chase & Co. First Data's total prepaid card revenues slipped 7%, mostly on declines in the closed-loop sector. But open-loop, or network-branded, prepaid card revenues rose, mainly because of new payroll cards, especially the Wal-Mart Stores Inc. program, Capellas said.