Hello, Western Union? First Data Calling

It's not the most glamorous business in the world. In fact, its very name is synonymous with obscurity: the back office. But if processing paperwork is low-profile work, it has also proved highly lucrative for First Data Corp., a spin-off of American Express Co. If you have a credit card from Visa or MasterCard, own mutual-fund shares, have sent an AmEx MoneyGram, or have paid a hospital bill of late, chances are that First Data, based in Hackensack, N.J., churned out your statement or collected your payment. "People don't see us," says First Data Chief Executive Henry C. Duques, "but we have a huge behind-the-scenes impact."

That impact generates results. Revenues have soared 45%, to $1.5 billion, since 1991, the last year AmEx owned First Data, while earnings jumped 47%, to $173 million. Salomon Brothers Inc. analyst James F. Kissane expects another profit rise of 20% this year, to $208 million, on revenues of $1.7 billion.

DISTANT SECOND. To keep the growth coming, First Data is trying to acquire Western Union Financial Services Inc., the profitable operating unit of New Valley Corp., which is under Chapter 11 bankruptcy protection. And that has Duques duking it out in a high-stakes bidding contest with none other than Forstmann Little & Co., the New York-based leveraged buyout firm. In June, First Data bid $660 million for the money-transfer company, topping Forstmann Little's $650 million offer. The final round of bidding is set for September.

First Data hardly seemed the kind of contestant to take on an LBO heavyweight under AmEx. While First Data did not process AmEx cards, customers such as Visa and MasterCard were irked that it was owned by a rival. Since the spin-off, First Data has grown to dominate the industry, handling more than 70 million transactions annually. Meanwhile, First Data has moved into other financial back-office work, such as preparing mutual-fund statements and providing health-care and cable-TV billing.

Acquiring Western Union is key to sustaining that growth. First Data has aimed for the money-transfer business since its spin-off, boosting its share of the $450 million market from 3% to 10%. But it is a distant second to Western Union, which, with 24,000 agents worldwide, holds 85%. And it's a fast-growing business, thanks to big numbers of immigrants who send money home. Kissane expects annual growth to top 15%.

But while Western Union dominates, it's burdened with antiquated equipment. Operating margins run 26%, while Kissane estimates First Data earns 30% on its highly efficient transfer and bill-paying service. By modernizing Western Union and applying the same back-office savvy that he has put to card processing, Duques should squeeze greater profits from the far-flung network.

To do that, though, he has to win the battle. Forstmann won't comment on Western Union. Although First Data's current bid tops Forstmann's--each bidder has also agreed to assume Western Union's debt and estimated $400 million in pension liabilities--Forstmann may yet up its offer. Other bidders could also emerge. The three highest bidders will make final bids, with the winner announced Sept. 19. Analysts say the price could hit $750 million.

WAR PATHS. A price tag that high could stretch First Data. While Forstmann has an estimated $2 billion war chest to finance takeovers, First Data has only $300 million in cash and just agreed to pay $156 million in stock for Envoy, a Nashville-based provider of credit-card services. Duques acknowledges that First Data will have to boost debt, leaving Wall Street worried. With First Data's debt currently running at 35% of total capital, "the central questions are how much cost can be wrung from Western Union and how great are the savings," says David M. Togut, an analyst with CS First Boston.

Duques says immediate benefits will come from combining First Data's agent network with Western Union's. Salomon's Kissane says that alone will save $40 million, with an additional $65 million from consolidating overhead. Duques also plans to expand sales of First Data's offerings through Western Union.

One thing Duques says he won't do is overpay. He scoffs at Wall Street fears that he will overleverage his company to win. "If we can't find the leverage and cost savings to make this work, we'll drop out," he says. "We have a very good business that's growing three times faster than Western Union." One way or another, Duques' low-profile days in the back office are coming to an end.

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