(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
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- Reuters: Payment processor TSYS to buy NetSpend for $1.4
Blue clues [ID:nL1E8L54FC]
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(Editing by Jeffrey Goldfarb and Martin Langfield)
Keywords: BREAKINGVIEWS NETSPEND/TSYS
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