Breakingviews-U.S. debit-card deal recalls value of subprime

Thu Feb 21, 2013 3:02am IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Antony Currie

NEW YORK, Feb 20 (Reuters Breakingviews) - Just when U.S. banks are finally working through all the bad loans, along comes a deal to remind them of the value of subprime. Since the crisis, mainstream lenders have all but abandoned customers with middling to poor credit history. Yet prepaid debit-card provider NetSpend NTSP.O is selling itself to payment processor Total System Services (TSS.N) for a cool $1.1 billion.

The deal values NetSpend at a 30 percent premium and 17.5 times this year's estimated adjusted earnings for 2013. That's better than even the best of the big banks. US Bancorp (USB.N) currently trades at a multiple of just 11 times earnings. NetSpend fetched the eye-popping valuation because it's in the sweet spot of U.S. retail financial services, which is an otherwise mature market.

New regulations have made providing basic checking accounts to people with lower credit scores much less profitable. The Durbin Amendment in the 2010 Dodd-Frank Act, for example, capped at 24 cents a swipe the fees banks can charge merchants on regular debit card transactions – almost half what the average fee used to be. That led JPMorgan Chase (JPM.N) boss Jamie Dimon to estimate that some 5 percent of retail customers might no longer be able to get a regular bank account.

Prepaid debit cards, though, are exempt from the fee cap. And they're a growth market, with the dollar value of transactions paid with such cards expected to double to $411 billion by 2016, according to First Annapolis Consulting. Though the likes of Chase and American Express (AXP.N) are muscling their way into this corner of the market, neither is as established or as natural a player.

Despite the apparent upside, the deal didn't go down well in the market. The buyer, known as TSYS, expects NetSpend to enhance earnings right away, but was cagey about any potential cost cuts. The resulting $285 million decline in its stock price on Wednesday roughly equates to the whopping premium it is paying. Shareholders may not fully appreciate the value of the market growing by 20 percent a year. Bank executives looking on surely will.

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CONTEXT NEWS

- Payment processor Total System Services, or TSYS, has agreed to buy prepaid debit card provider NetSpend for $1.4 billion including debt. The $16-a-share offer represents a 30 percent premium to the closing price of NetSpend shares on Feb. 19 and works out at 17.5 times estimated adjusted net income for 2013.

- Reuters: Payment processor TSYS to buy NetSpend for $1.4 billion [ID:nL4N0BJ768]

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(Editing by Jeffrey Goldfarb and Martin Langfield)

((antony.currie@thomsonreuters.com)(Reuters messaging antony.currie.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS NETSPEND/TSYS

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