Eye on Private Equity: Deals for Alliance Data And TransFirst

Private-equity financing continued to make itself felt this week in the transaction-processing business, with Blackstone Capital Partners VLP's $7.8 billion bid for Alliance Data Systems Corp. and GTCR Golder Rauner LLC's decision to sell TransFirst LLC to an even bigger investment house, Welsh, Carson, Anderson, & Stowe, for $683 million. These deals follow by one week news that eFunds Corp. is the target of unnamed suitors. And last month came the announcements that Kohlberg, Kravis, Roberts & Co. had agreed to pay $29 billion for First Data Corp. and that Marshall & Ilsley Corp. is planning a $4 billion spin-off of Metavante Corp. to M&I shareholders and Warburg Pincus. Here's a roundup of this week's deals: Dallas-based Alliance Data announced Thursday it had agreed to be sold to Blackstone for $81.75 in cash per share, a price that reflects a 30% premium over the publicly held processor's May 16 closing price. The company, which specializes in private-label processing for specialty retailers and also operates Canada's largest coalition marketing program, Airmiles, generated $347.3 million in operating income last year on nearly $2 billion in revenue. The parties expect to close the deal by year-end, subject to regulatory approvals and approval from Alliance Data's shareholders. “Our clients will now have the added benefit of working with an organization that is completely focused on their success,” said J. Michael Parks, chief executive at Alliance Data, in a statement. “And our teaming with Blackstone, which has a demonstrated track record of investing in and growing the firms it acquires, will benefit our clients now and in the future.” New York-based Blackstone, which has raised $32 billon through five funds over the past 20 years, has invested in a wide array of companies, among them Deutsche Telekom and Freescale Semiconductor. 11-year-old Alliance Data sells marketing and transaction processing services to some 600 client companies. It processes private-label cards for more than 85 retail companies with 107 million cardholders, making money from transaction fees and from financing and securitizing the accounts. It also provides merchant processing for petroleum retailers. Its Airmiles rewards program claims more than 9 million consumers, or about two-thirds of Canadian households, with about 100 participating sponsors. The company was born of private equity, having been formed in 1996 out of two acquisitions made by Welsh, Carson, Anderson, & Stowe. These were J.C. Penney & Co.'s BSI Business Services Inc., a transaction processor, and The Limited Brands Inc.'s credit card bank, World Financial Network National Bank. It went public in 2001, and Welsh, Carson sold its last shares in October. New York-based Welsh, Carson, however, proved this week it too still has its eye on processors, agreeing to take TransFirst off GTCR's hands. The deal was not long in the making. “We had been talking to Welsh for a good month now, and the discussion heated up and here we are,” says Andrew Rueff, senior vice president for corporate development at TransFirst. He says the deal could close within 45 days. With GTCR's backing, TransFirst has been an acquisitive company, snapping up such assets over the years as Bank of America Merchant Services Inc., Payment Resources International, and Fifth Third Bank Processing Solutions' third-party sales merchant division. But the time had come to seek deeper pockets. “We'd like to continue doing acquisitions, and as we looked at our capital it made sense to look at a private-equity company that was a little larger,” says Rueff. Welsh, Carson, which has $16 billion under management, twice the invested capital claimed by GTCR, has not committed any particular sum to TransFirst. “They've indicated if there's a good acquisition, they'll provide the capital,” says Rueff. GTCR had funded a warchest for TransFirst acquisitions amounting to $135 million, Rueff says, but the company has “accessed almost all of that. It was going to be hard for [GTCR] to put in a lot of additional capital.” Chicago-based GTCR, which also holds stakes in VeriFone Holdings Inc. and National Processing Co., had been invested in TransFirst for seven years, a long time by private-equity standards, and had been instrumental in the company's rapid growth. Now, Rueff says, with funding from the larger Welsh, Carson, TransFirst will be in a position to buy assets that will allow it to enter or bring in-house stored-value services, loyalty marketing, bill-payment processing, and health-care-related card processing. The company now relies on outside vendors for stored-value and health-care card processing. Rueff says the company will also consider acquiring entities that will allow it to bring in-house its front-end authorization and capture and back-end settlement and statement-rendering services. “We've identified targets that would allow us to do that,” he says. With 155,000 merchants on board, for which it is processing $25 billion in volume annually, TransFirst is nearing the point where it will need to operate its own front and back end, Rueff says. “You're going to see a TransFirst evolve over the next few years that is very focused on bringing things in-house,” says Rueff. “Under GTCR, we focused on building scale. Now the bigger focus is going to be on making TransFirst a solid technology company.”