(April 21, 2008) The troubled buyout of Alliance Data Systems Inc. by private-equity firm The Blackstone Group officially died this past weekend, a death that came as no surprise to the payments industry. But still alive is Alliance’s effort to sell its merchant-acquiring business built around the former BSI Business Services Inc. front-end platform for petroleum retailers.

Last month, Dallas-based Alliance said it would entertain offers for the processing business and also its unit that provides customer service and billing services to utilities. In a March 13 investor presentation, Alliance said it wanted to exit those two segments “due to [the] commodity-type nature of merchant bank-card acquiring services and utility-services business,” and that the “fit is no longer strategic.” The company said the operations are profitable on a pre-tax basis, but claims they have negative cash flow because of their capital-expenditure needs. Instead, Alliance will concentrate on its higher-margin loyalty and marketing services segments and its private-label credit card issuing operation.

“We are actively seeking prospective buyers for both businesses, but we cannot comment any further beyond that,” an Alliance Data spokesperson tells Digital Transactions News via e-mail.

Alliance Data inherited the BSI platform, which was developed by retailer J.C. Penney & Co., when the company was created in 1996 as an amalgamation of that business and The Limited Brands Inc.’s credit card operation. The platform remains sizable, estimated to be serving more than 50,000 merchant locations and generating more than $15 billion in annualized charge volume.

Who might buy the merchant-acquiring business is now a subject of some speculation. Adil Moussa, a payments researcher for Boston-based Aite Group LLC, agrees with Alliance’s assessment that the business is low-margin, but says it might generate higher returns if it was paired with another business or platform that serves the petroleum industry. “That’s the only way,” he says. His short list of possible buyers includes U.S. Bancorp, a big merchant acquirer that also owns the Voyager fleet-fuel card, or No. 1 card processor First Data Corp. by virtue of its breadth of offerings.

As that prospective sale develops, Alliance is washing its hands of its long-troubled agreement to be bought by affiliates of Blackstone, though Alliance’s lawyers will remain busy as it has sued Blackstone for a second time. The $6.8 billion deal, struck last May, had an expiration date of 11:59 p.m. Eastern time Thursday. In announcing late Friday that it had terminated the deal, Alliance said Blackstone notified Alliance earlier in the day that Blackstone was terminating the agreement. But Alliance said Blackstone’s termination “was ineffective” because Blackstone was in breach of the merger agreement. Instead, Alliance said it, Alliance was terminating the agreement and suing Blackstone in New York State Supreme Court in Manhattan for the $170 million business-interruption fee Alliance says Blackstone owes it under deal’s terms. A Blackstone spokesperson did not respond to a Digital Transactions News request for comment.

In late January, Alliance sued Blackstone, alleging the private-equity firm was stalling in completing the deal. Blackstone had indicated that it was having trouble reaching an agreement with the federal Office of the Comptroller of the Currency about adequate reserves for Alliance’s credit card bank. Alliance, which in effect called that reasoning a smokescreen for an attempt to back out of the deal, later withdrew the lawsuit. Now, in its latest suit, Alliance accuses Blackstone of failing to negotiate in good faith with the processor to reach acceptable terms with the OCC, and of presenting a “façade of cooperation” while really intending to run out the clock.

The backdrop of the failed deal is the extreme tightening of the credit markets since last summer because of massive losses in the subprime mortgage-lending market. Alliance’s new lawsuit alleges that after the deal was struck and Alliance’s shareholders approved it, Blackstone Group “came under intense pressure” from its lenders, who had committed more than $6 billion to fund the purchase, to abandon the transaction. “As the credit markets tightened, Blackstone Group knew that the lenders stood to lose many hundreds of millions of dollars if the deal closed,” the lawsuit says.

Kohlberg Kravis Roberts & Co.’s $29 billion acquisition of First Data was the last big leveraged buyout to close before the credit markets virtually shut down (Digital Transactions News, Sept. 25, 2007).