If It Happens, a TSYS Spin-off Will Add to Industry Overhaul

Confirming long-standing industry speculation, Columbus, Ga.-based bank-holding company Synovus Financial Corp. on Tuesday said it would consider spinning off its processing subsidiary, Total System Services Inc. (TSYS), to Synovus shareholders. Assuming a spin-off eventually happens, TSYS will have played a key role in 2007's major processing-industry restructuring that will take such companies as First Data Corp. and Alliance Data Systems Corp. private while at the same time setting TSYS and Metavante Corp. free from bank ownership. TSYS chairman and chief executive Philip W. Tomlinson said at a second-quarter earnings conference call he would not comment about the possible spin-off until Synovus's board of directors makes a decision. Synovus owns 80.8% of TSYS, whose remaining common shares trade on the New York Stock Exchange. In a statement, Synovus chief executive Richard E. Anthony said he would ask Synovus's board at its Thursday meeting “to consider all TSYS spin-related issues” and to appoint a special committee of independent directors to make a recommendation. Anthony set no hard date for action, but said he hopes to announce the board's decision no later than Synovus's third-quarter conference call. TSYS also is forming a special committee of its own independent directors to assess spin-off issues. Tuesday's disclosures didn't surprise many processing-industry observers. “I think that was a long time coming,” says Brett Horn, an analyst who follows processors for Chicago-based Morningstar Inc., an independent financial research firm. “There's really no reason for those two companies to be together.” The rap against banks owning processors, according to Horn, is that funding a processor's growth strains the bank's capital, which is subject to federal regulation. “Any debt on TSYS's balance sheet is counted against Synovus's reserve ratios,” he says. In a similar transaction, Milwaukee-based banking company Marshall & Ilsley Corp. plans to spin off to shareholders its fast-growing Metavante processing subsidiary. Horn told Digital Transactions News sister publication Digital Transactions magazine for its July edition that the spin-off will free up growth capital for both Metavante and M&I. Private-equity firm Warburg Pincus LLC will own 25% of Metavante when the deal closes. Meanwhile, TSYS late Monday reported second-quarter earnings of $65.7 million, up 14.4% from $57.4 million a year earlier, on revenues of $460.2 million, an increase of 7.2% over $420.2 million in 2006's second quarter. Tomlinson said that thanks to cost-cutting and internal growth, TSYS is rebounding nicely from the loss of its largest portfolio late last year, the consumer credit card file of Bank of America Corp. BofA took that file in-house, but TSYS still has ties to the huge bank, which left the processing of its commercial card transactions with TSYS. In January TSYS also began doing card production for BofA's debit card portfolio, the nation's largest, and its commercial card file. TSYS also is processing the Wal-Mart MoneyCard prepaid card issued by General Electric Co.'s GE Money Bank for Wal-Mart Stores Inc. Merchant-processing revenues were soft, however, falling 2.3% to $64.3 million in the second quarter from $65.8 million a year earlier. TSYS faces another big loss of conventional cardholder-processing business in the third quarter when JPMorgan Chase & Co. takes its card file off of TSYS's third-party platform and begins processing card transactions itself using TSYS's TS2 system. Tomlinson has said earlier that the switch will reduce TSYS's revenues but should not hurt profitability.