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

Is it Too Expensive?

In 2012, the combined EBITDA was around $613 million, 16% higher than Total System’s EBITDA of $528 million. With the current trading price of $22.90 per share, Total System’s market cap is $4.25 billion. The market is valuing Total System at 8x EV/EBITDA. After the deal, Total System would take on an additional debt of $1.3 billion and generate $613 million in EBITDA. Thus, the EBITDA multiple would be 9x. As NetSpend generated more than $87.1 million LTM EBITDA, the deal valued NetSpend at around 13.6x EV/EBITDA. The deal seems to be relatively quite expensive compared to Total System’s valuation and the market valuation of DFC Global Corp (NASDAQ:DLLR), one of NetSpend’s peers. DFC Global is trading at $18.90 per share, with a total market cap of $792 million. The market is valuing DFC Global at only 5.32x EV/EBITDA. Among the three, DFC Global seemed to be the most profitable company. Its operating margin was the highest at 24%, while the operating margins of NetSpend and Total System were 20% and 19%, respectively. Among the three, only Total System is paying a 1.7% forward dividend yield to shareholders, whereas NetSpend and DFC Global are not paying any dividends.

My Foolish Take

I think Total System has overpaid to acquire NetSpend. Total System would be valued quite higher than the pre-acquisition’s valuation due to its significant debt financing for the deal. Among the three, DFC Global is the better bet than the other two due to its highest operating margin and lowest valuation.

The article A Sweet Deal for NetSpend’s Shareholders originally appeared on Fool.com and is written by Anh Hoang.

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