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Total System Services Inc. on Tuesday brought to an end a short-lived joint venture with First National Bank of Omaha by buying the 49% of FNBO unit First National Merchant Solutions LLC it didn’t already own. In the deal, TSYS paid FNBO $169.6 million for the remaining stake, implying a valuation for FNMS, one of the nation’s largest acquirers, of $346 million, up 17% since April, when TSYS bought its 51% share for $150.5 million and inaugurated the joint venture.
The latest deal also cements in place a strategic change of direction taken by Columbus, Ga.-based TSYS last year. When the processor entered the joint venture with FNBO, it reversed course on years of eschewing direct involvement in managing merchant portfolios, fearing conflict with acquiring clients. Now, by taking over FNMS and its 300,000 merchant contracts completely, TSYS hopes it will have better control over the acquirer, which is being rechristened TSYS Merchant Solutions, than it had with the joint-ownership arrangement. “It dawned on both of us [TSYS and FNBO] that maybe the timing was right to go ahead and consummate the transaction,” M. Troy Woods, president of TSYS, tells Digital Transactions News. “It really happened just like that.”
The JV, Woods says, diluted that control. “It was just different in a joint-venture situation,” he notes. “Once you take full ownership of anything you have more unilateral capability.” For one thing, he says, greater control will allow TSYS to “accelerate some platform decisions,” though he adds that there are no specifics yet on what might be under consideration.
“This [deal] testifies to [TSYS] wanting to be a full-suite merchant acquier and processor nationally and internationally,” says Eric Grover, principal at Intrepid Ventures, a Menlo Park, Calif.-based investment-advisory firm. “They want to compete head-to-head in a business that’s going to remain unregulated and that’s a global business.”
One risk for TSYS is that FNMS processes for merchants that are clients of National Processing Co., a Louisville, Ky.-based merchant processor acquired last year by Cincinnati-based Fifth Third Processing Solutions LLC. Observers say many of these merchants are likely to move to the Fifth Third platform as result of that acquisition. TSYS would not comment on the matter beyond a spokesman’s statement that “Fifth Third’s purchase of NPC and NPC’s relationship with FNMS were taken into consideration as part of our due diligence.” The spokesman says TSYS officials may have more to say on the matter in a conference call set for Jan. 25.
For its part, FNBO can now concentrate on businesses closer to its core functions as a bank. The bank is a subsidiary of First National of Nebraska, the largest privately owned bank in the country. It and its affilitates control $17 billion in assets. “First National recognizes the strategic and capital benefits of completing the next phase of this venture,” said Daniel O’Neill, president of FNBO, in a statement. “The timing is right for all parties involved.”
Grover says FNBO’s decision to sell its stake in FNMS can be seen as part of a trend among banks since the onset of the financial crisis in 2008. “Banks have rethought the role of merchant acquiring and processing and have been willing to part with it as outside the core,” he says.
The deal is not the first time TSYS has bought out a partner’s stake in an acquiring operation. In 2005, the processor bought Visa Inc.’s 50% share in the TSYS-Visa venture Vital Processing Services, an acquiring processor. The next year, it renamed the company TSYS Acquiring Solutions.
While it is relinquishing its ownership stake in FNMS, FNBO will continue to provide BIN sponsorship and merchant referrals, says Diana Mehochko, president of the joint venture who continues as president of TSYS Merchant Solutions. BIN refers to bank identification number, the key data required by the bank card networks for access to their systems. Mehochko says FNMS, which maintains about two dozen relationships with large independent sales organizations, has already been in touch with those ISOs to explain the change in ownership.
FNMS processed $74 billion in card transactions in 2009 for both brick-and-mortar and e-commerce merchants, more than doubling its volume in four years. It has not yet released figures for 2010. “Suffice to say we have grown,” says Mehochko.
