Worldpay Tax Receivable Agreement

Worldpay Tax Receivable Agreement: Understanding the Basics

Worldpay, a global payment processing company, entered into a merger agreement with Fidelity National Information Services (FIS) back in July 2019. The merger created a new company, FIS Global, which is now one of the largest global payment processing companies in the world. As part of the merger agreement, Worldpay entered into a Tax Receivable Agreement (TRA) with FIS, which has aroused some curiosity among investors and businesses. In this article, we’ll break down the basics of the Worldpay Tax Receivable Agreement, including what it is, how it works, and what it means for businesses.

Defining the Worldpay Tax Receivable Agreement (TRA)

A Tax Receivable Agreement (TRA) is essentially a financial instrument that companies use to monetize their tax benefits. Essentially, a TRA agreement allows a company that is acquired by another company to defer some of its tax liability. In this case, FIS acquired Worldpay, and Worldpay entered into a TRA agreement to defer its tax liability.

The Worldpay TRA essentially allows FIS Global to take advantage of the tax benefits that Worldpay had built up over time. For example, if Worldpay had net operating losses, these losses could be used to offset future tax payments owed by FIS Global. This provides FIS Global with an immediate tax benefit that it can use to offset any tax the company owes, resulting in substantial savings.

How the Worldpay TRA Works

Under the Worldpay TRA, FIS Global will pay Worldpay a portion of the value of future tax savings that FIS Global realizes as a result of the TRA. The TRA will last for 15 years, and during that time, FIS Global will pay Worldpay 85% of the tax benefit it receives from using Worldpay`s tax attributes. This arrangement is often linked to the acquisition price, and in the case of Worldpay, it amounted to about $1.7 billion.

What the Worldpay TRA Means for Businesses

For businesses looking to acquire or merge with other businesses, a TRA can offer a significant financial benefit. By monetizing tax benefits, a company can significantly reduce its tax liability, resulting in substantial savings. However, a TRA can also be a double-edged sword if not carefully structured, as it can result in a significant future cash outflow.

For investors, the Worldpay TRA is generally seen as a positive development. The TRA is part of a broader trend of companies using tax strategies to reduce their tax liability. As such, businesses that can successfully structure a TRA agreement can potentially unlock significant value for their investors.

Conclusion

The Worldpay Tax Receivable Agreement is a complex financial instrument that allows FIS Global to benefit from the tax attributes that Worldpay had built over time. By monetizing these tax benefits, FIS Global can reduce its tax liability, resulting in substantial savings. However, TRA agreements can be tricky to structure and can be a significant future cash outflow if not carefully managed. So, businesses must weigh the potential benefits of a TRA carefully before entering into an agreement.

Comments are closed, but trackbacks and pingbacks are open.