Blackstone’s Alliance Data Deal Could Be Latest Victim of Credit Crunch

The already-delayed $7.8 billion buyout of Alliance Data Systems Corp. by private-equity firm The Blackstone Group may not be consummated, the Dallas-based payment processor disclosed on Monday. The news sent Alliance Data's shares down 34% and fueled speculation that the deal announced last May 17 would become the latest victim of the turmoil in the credit markets that started with the subprime-mortgage meltdown beginning in mid-2007. An Alliance Data press release indicated Blackstone was trying to blame federal bank regulators for throwing a monkey wrench into the deal. The release says Alliance received notice from a Blackstone affiliate late Friday that Blackstone does not anticipate satisfying a condition laid down by the Office of the Comptroller of the Currency, the U.S. Treasury Department's unit that regulates national banks, that it approve a change in control of an Alliance-owned bank. Alliance Data owns World Financial Network National Bank. The company also owns a Utah-chartered industrial bank, World Financial Capital Bank, which is regulated by the Federal Deposit Insurance Corp. Collectively the two banks issue more than 100 million private-label credit cards for about 85 retailers. According to the release, which quotes Blackstone's letter, Blackstone says the OCC is “demanding that extraordinary measures” be taken by Alliance and various Blackstone entities, measures “that represent operational and financial burdens” on Alliance and Blackstone “that that cannot be reasonably assumed.” “In subsequent communications from Blackstone's representatives,” the release goes on, “Blackstone stated that it is unwilling to satisfy the requirements specified in the OCC letter. Blackstone also expressed its belief that alternative solutions that would be acceptable to Blackstone would not satisfy the OCC, and therefore that further negotiations with the OCC would be futile.” The release does not state what the issues in dispute are. Alliance says it will not comment beyond the release, and a spokesperson for New York City-based Blackstone did not return a Digital Transactions News call for comment. Alliance says it “strongly disagrees” with Blackstone's assertions that the OCC's most recent proposal to Blackstone's lawyers represented the agency's “final position” about the required approvals. The company also took issue with Blackstone's portrayals of the OCC's conditions as “extraordinary measures” that would place operational or financial burdens on the buyout partners. Using a federal regulator as a foil may be a way for Blackstone back out at a time when financing is getting harder to obtain, and possibly to escape payment of a $170 million termination fee should the deal fall through. The buyout agreement specifies that either party could be charged the fee if it fails to carry out its proscribed duties in completing the deal. It's unclear if the fee would kick in if bank regulators don't give their OK. Today's release says Blackstone has not asserted that Alliance Data has breached the deal's terms, and it also says Blackstone has acknowledged that Alliance Data has used its “best efforts” to obtain OCC clearance. “I'm wondering if Blackstone was looking for an excuse to get out of the deal,” says Brett Horn, an equity analyst with Chicago-based Morningstar Inc. who follows payment processors. “When that buyout happened, it was pre-credit-market crisis and pre everybody thinking we're going into a recession.” Indeed, No. 1 payment processor First Data Corp. went private in September just before the doors closed on other pending buyouts by private-equity firms as banks, spooked by rising defaults in subprime mortgages, started to tighten credit throughout the economy (Digital Transactions News, Sept. 25, 2007). Alliance Data had hoped to close its buyout in the fourth quarter. In response to persistent market rumors that the deal was in trouble, Alliance Data had issued press releases, mostly recently Jan. 17, saying it was on track. While most payment processors don't make loans and thus are largely immune to the credit-quality problems mortgage and credit card lenders already are or soon expect to be encountering, Alliance Data does have some exposure because of its big retail card operation, Horn notes. Alliance's Credit Services segment, which accounts for 35% of revenues and had $3.9 billion in average managed receivables in the third quarter, had a managed chargeoff rate of 5.7% in the quarter, up from 4.9% in 2006's third quarter. “It's a good company but they've got some headwinds,” Horn says. Alliance Data's stock closed at $65.60 per share Friday, but prices had dropped by $22 in noontime trading. The buyout would pay investors $81.75 per share. Alliance Data is scheduled to report its fourth-quarter financials on Wednesday. In the meantime, the company says it is evaluating “possible courses of action.”