Did Buyer’s Remorse at Cap One Sink the $700 Million NetSpend Deal?

Though Capital One Financial Corp. and prepaid card manager NetSpend Holdings Inc. late on Monday said they had “mutually agreed” to call off Cap One’s planned $700 million cash acquisition of NetSpend, the move may have been a consequence of the deal’s hefty price tag, says an analyst who follows the prepaid card market. The rich price Cap One, a big credit card and auto-loan firm, was going to pay for a well-known but relatively small company may have led the lender to reconsider, according to Adil Moussa, an analyst at Boston-based Aite Group LLC. n
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An April 2006 New York Times article estimated privately held NetSpend’s annual revenues at $75 million to $125 million. Assuming NetSpend’s 2007 revenues are at the high end of that estimate, Capital One’s buyout price would represent a multiple of 5.6 times revenues and likely a much higher multiple over earnings.n
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“It was a lot of money to offer for a company that size,” says Moussa. “When were they going to get an ROI [return on investment] on that?” An Aite research report estimates NetSpend has about a 9% share of the so-called program-management side of the prepaid card business, the side that involves back-office processing, pricing, and settlement. The top three competitors in the niche, Green Dot Corp., Ecount Inc., and NetSpend collectively have a 26% share of program-management market volume, according to Aite.n
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Neither company will give details about why the acquisition, announced in August, was called off. “Through our continued discussions with NetSpend we jointly determined that both companies would be best served by restructuring and expanding our existing relationship,” a spokesperson for McLean, Va.-based Cap One tells Digital Transactions News by e-mail. A NetSpend executive was unavailable for comment.n
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Cap One says it will still take an undisclosed minority stake in Austin, Texas-based NetSpend and likely will get a seat on NetSpend’s board of directors. The two firms also say they plan work together on products for the fast-growing prepaid card market.n
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In a release, Capital One and NetSpend said they “intend to jointly pursue the distribution of prepaid card products through a variety of mainstream retail channels,” but they didn’t elaborate. NetSpend’s forte is Visa- and MasterCard-branded prepaid cards for the underbanked (Digital Transactions News, Aug. 8). Cap One, meanwhile, is trying to branch out from its core credit card business and this spring shook up the debit card world with the industry’s first so-called decoupled general-purpose debit card. The MasterCard-branded card doesn’t require the customer to have a demand-deposit account with Cap One (Digital Transactions News, June 7).n
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Capital One said it has an option to increase its stake in NetSpend.