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No stranger to prepaid cards, payment card processor Total System Services Inc. (TSYS) will become a major force in the prepaid niche with its planned cash acquisition of program manager NetSpend Holdings Inc. that values NetSpend at $1.4 billion. The deal the two companies announced late Tuesday would pay NetSpend shareholders $16.00 per share and is expected to close in mid-2013.
The acquisition of Austin, Texas-based NetSpend will put one of the prepaid card industry’s star players under the TSYS tent. NetSpend currently services more than 2.4 million accounts, 46% of which are direct-deposit accounts, with more than 500 retail distributors with 62,000 locations, and 130,000-plus reload locations, according to a joint TSYS-NetSpend news release. Plus, NetSpend has developed its own technology platform for processing.
In 2007, the big credit card issuer Capital One Financial Corp. tried but failed to buy NetSpend for $700 million, a price at least one observer at the time said was too high.
But NetSpend, which targets unbanked and underbanked consumers through various distribution channels, has been prospering since then. Its revenues have grown at a compounded annual rate of 22%, rising from $128.6 million in 2007 to $351.3 million in 2012, according to a TSYS-NetSpend investor presentation. Pre-tax earnings have grown at a 25% annual rate. For 2012’s fourth quarter, NetSpend reported net income of $10.1 million, up 5% from a year earlier, on $89.7 million in operating revenues, up 17%. NetSpend’s stock closed at $12.29 on Tuesday, so the planned buy-out would pay its shareholders a 30% premium.
Philip W. Tomlinson, chairman chief executive of Columbus, Ga.-based TSYS, called the acquisition “a transformational event for TSYS and consumers alike.”
“It enables us to meet our strategic goals of diversifying our business, being a more innovative payment solutions provider and expanding our role within an area of payments that is expected to grow at a 20% annual rate over the next four years,” he said in the release. “The acquisition also complements our already strong presence in the prepaid processing space.”
TSYS’s latest financial report says it had 115.9 million prepaid/stored-value card accounts on its processing system at the end of 2012, up 36% from 85.2 million in 2011, though how many of those accounts are active could not be immediately determined. But the company will lose business from a key prepaid card customer, NetSpend’s arch-rival Green Dot Corp., which plans to bring its processing in house. Green Dot will do that through the platform it acquired last year when it bought assets of another prepaid card company, eCommLink Inc.
Tim Sloane, director of the Prepaid Advisory Service at research and consulting firm Mercator Advisory Group Inc., estimates that TSYS is paying what he calls a relatively low $595 per active NetSpend card in return for a strong foothold in the fast-growing market for general-purpose reloadable (GPR) prepaid and payroll cards.
“TSYS has added a set of capabilities that can be offered to its traditional merchant and financial-institution clients,” Sloane tells Digital Transactions News by e-mail. “This appears to put TSYS in a strong overall position within the prepaid market and should more than cover any loss in transactional fees associated with Green Dot taking over its own processing.”
After the deal closes, NetSpend will operate as a stand-alone subsidiary headed by its current chief executive, Dan Henry, and president, Chuck Harris. In the release, Henry said the resources of TSYS will take NetSpend “to the next level.”
“We bring a meaningful, fast-growing business to TSYS, and we will be able to offer our unique products and services to the unbanked consumer faster than ever before,” he said.
The deal is not without risk for TSYS. Although it will chip in some cash on hand, TSYS is financing most of the deal, some $1.3 billion, with debt. The acquisition needs an okay from NetSpend shareholders and other customary approvals.
