iPayment CEO Sweetens His Offer, But Cautions Company’s Board

The latest offer from the top executive of Nashville, Tenn.-based merchant processor iPayment Inc. to buy the company and take it private is higher than the one he presented this spring, but contains what appears to be a blunt statement to iPayment board members that they should accept the offer this time. After being rebuffed earlier this year, Gregory S. Daily, iPayment's chairman and chief executive, last week submitted a second buyout offer valued at $43 per share, 13% higher than his original, $38-per-share offer and 20% over iPayment's $36 Nov. 1 close, the day before the offer. A special board of directors committee rejected Daily's first offer in July and announced plans to explore other alternatives for enhancing shareholder value, including a possible sale of the company to others. So far, however, no buyers have emerged. After withdrawing his first offer, Daily had indicated his management team would participate in a transaction and remain with the company. But, in a letter presenting his latest offer, Daily said: “Upon further consideration, I must inform you that, at the price levels the company is seeking, I have decided that I am not prepared to 'roll over' my shares into a transaction led by a third party. Phrased differently, while I am prepared to lead, arrange and organize an acquisition as described in this letter, and while I and, I believe, key members of management would be prepared, for an appropriate incentive package, to remain with the company following a transaction led by others, I am not prepared to invest in a sponsor's or other partner's deal or have my shares treated differently than those of others in such a transaction at these price levels.” Executives at iPayment won't talk to the press or analysts. But Gary Prestopino, an analyst who follows processor stocks for Chicago-based Barrington Research, says, “I think that Greg is saying, 'accept my offer, let's get this over with.'” In the letter, Daily reiterated his belief that taking iPayment private would reduce costs and management attention related to its public status, allowing executives to focus more the business and “value creation.” Daily also said his new offer “represents the best price available for the purchase of the company's shares.” Prestopino agrees the offer is “better than the first,” but it still comes in at the low end of a range of what Wall Street typically would view as acceptable?about 10 to 13 times operating earnings per share after backing out interest and certain other expenses. IPayment's shares closed 11% higher Nov. 2 over the Nov. 1 close. Market observers say management-led buyers are subject to potential conflicts in that the would-be buyers are obligated to get the best price for shareholders but also have an interest in keeping costs as low as possible. Daily owns about 11.6% of iPayment's shares. Meanwhile, iPayment last week reported a strong third quarter. Net income grew 26% over 2004's third quarter to $8.13 million, and revenues rose 88% to $175.2 million. The company serves 126,000 small merchants through 750 independent sales groups with a total sales force of 2,600, and a direct sales force of 100 employees. Charge volume for the nine months ended Sept. 30 was $19.2 billion, up 105% from $9.37 billion in the year-earlier period. The company has made several acquisitions in the past year, including a merchant portfolio from First Data Corp. for $130 million in cash.