April 13, 2013
Interviewed by: David Snow
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Deal Story: Scott Nuttall of KKR on First Data

When KKR first looked at First Data, says Scott Nuttall, head of global capital and asset management at the firm, it was struck at the somewhat sleepy culture and a management team not on speaking terms. The firm also saw many ways to improve an already strong business. Then the recession struck.

When KKR first looked at First Data, says Scott Nuttall, head of global capital and asset management at the firm, it was struck at the somewhat sleepy culture and a management team not on speaking terms. The firm also saw many ways to improve an already strong business. Then the recession struck.

Scott Nuttall, KKR: When we met with the company, you can tell a lot when you actually sit down and talk to a management team. So we asked– one of the simple questions was show us your monthly monitoring reports. Because you can tell how closely they’re tracking.

They gave me a piece of paper, I kid you not, that had earnings per share out to five decimal places. That’s the way they looked at their business, which of course is completely irrelevant. Because that’s a consequence of your effort as opposed to what you should be looking at.

We got excited, because culturally sleepy, a bit broken, the senior management team was not on speaking terms at the time. Just pretty interesting dynamic, and yet somehow they had 30+% margins and were generating $2 billion of EBITDA. So tell you how great the business is when it can be run poorly and still generate those kinds of results.

But we got to know the senior team and really liked elements of the senior team. And ended up making the investment with the basic notion that you’ve got secular wind at your back as people move from cash and check to credit and debit. You’ve got an ability to materially improve the company, operationally. And you’ve got the biggest player in the space and you’ve got the brand.

We saw a lot of ways to improve the business. That one, frankly, got out of the box really well– beat budget for the first year and a half. And then credit crisis, recession. First Data makes its money by processing transactions and it matters a lot how much consumers spend and where they spend. So we make more money at a specialty retailer than we do at a discounter.

What happened during the crisis is people stopped spending and that hurt the business. And the second thing that happened is we make money from credit card transactions, and actually how many cards are issued by banks. Well, as you can imagine, during the great recession banks stopped issuing credit cards.

So the company had a real test for the first time ever. That it saw organic revenue declines first time in its entire history. And so EBITDA fell– didn’t fall as much as you would have expected, given what happened, but it did go down 15-20%. And now we’ve been managing the company out of that and starting to benefit from a lot of the operating disciplines that we put in place. That story is still playing out.

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