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A Sweet Deal for NetSpend Holdings Inc (NTSP)’s Shareholders

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Recently, Total System Services, Inc. (NYSE:TSS) announced that it would buy NetSpend Holdings Inc (NASDAQ:NTSP) at about $16 per share, with a total transaction value of $1.4 billion. The offering price represented a 26% premium on NetSpend’s closing price last Monday.  Is $16 per share price tag fair for NetSpend’s shareholders? Is Total System a buy after this deal? Let’s find out.

NetSpend Holdings Inc (NASDAQ:NTSP)NetSpend and Total System Business

NetSpend Holdings Inc, founded in 1999, is a provider of general-purpose reloadable (GPR) prepaid debit and payroll cards to the under-banked and other consumers in the US. The company is selling its card via different distribution channels, including traditional retailers, directly-to-consumers, online marketing programs, etc. As of December 2012, NetSpend had more than 2.35 million active cards, as well as 500 distributors in more than 60,000 locations in the US. In the past 5 years, NetSpend has experienced a consistent growth in its revenue, from $183 million in 2008 to $351 million in 2012. However, the company generated a loss of $11.65 million in 2008. The loss in 2008 was due to a charge of $26.3 million for goodwill and intangible impairment. In 2012, NetSpend incurred nearly $37 million in settlement losses, which reduced the net income to $18.9 million. The operating cash flow in 2012 was $38 million.

Total System is a global payment solutions provider with three main operating segments: North America Services, International Services and Merchant Services. The majority of its revenue, $965.4 million, or 51.6% of the total revenue, was generated from North America Services. Merchant Services ranked second with nearly $512.6 million in revenue in 2012, while the International Services generated around $413.5 million in revenue.

Five Strategic Reasons to Acquire NetSpend

In order to finance the purchase of NetSpend, Total System will use its cash on hand and $1.3 billion in debt. The transaction is expected to be completed in the middle of 2013. In its presentation, Total System listed five main reasons to purchase NetSpend. First, Total System could enter a fast growing prepaid market that was expected to double in the next 4-5 years. Second, it could give Total System an opportunity to create new partnerships with its existing bank customers. Third, the company could expand its customer base by entering new segments, including Corporates and Government Agencies. Fourth, Total System could leverage NetSpend’s wide distribution network and innovative products. Last but not least, the deal would give Total System a better diversification. After the buyout, the North America Services segment will represent only 41% of the total revenue, while NetSpend will account for 18% of the total revenue.

Source: Total System’s presentation

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