Stock of the Day
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Alliance Data Systems (ADS)
Blackstone Buying Out Alliance Data for $6.8bn
Private equity giant Blackstone Group strikes again, acquiring Alliance Data Systems in a deal valued at $6.76bn. The move to purchase the credit card services provider was met with glee by investors, who boosted ADS shares by nearly 25%. The deal, another in a long series of private equity buyouts, is not expected to result in the company's dissolution; rather, analysts expect Blackstone to improve efficiencies and then take the company public for a hefty profit. And with such a large premium (30%) it is unlikely that Blackstone will face much competition on the deal. What makes ADS such a hot target for acquisition, and what does the move mean for the industry?
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| Daily Chart |
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| Stock Analysis |
Alliance Data provides marketing services to credit card companies through the analysis of data. While this does not seem like an overly exciting segment of the giant credit card market, companies are willing to pay ADS for helping them understand the nuances involved in retaining profitable customers. With so many competitors in the credit card market jostling for customers, ADS has the unique capability to provide loyalty solutions that will companies count on for reducing customer turnover. They help facilitate the creation of rewards programs (such as frequent flyer miles), as well as ventures and cross-promotion between car rental companies, hotels and other firms looking for extra business.
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ADS has had a decent year so far. In April it announced record 1Q results: a 15% bump in revenue to nearly $550m. Its net income increased 1% to $56.9m, edging 1Q 2006 results by $0.5m, and was driven by strong performance in both US and Canadian markets. This falls in line with the company's overall performance over the past 5 years, which has seen shares rise from $20.45 to $64.33 (excluding the 25% jump seen today). Growth has been exceptionally brisk since 2006, when shares rocketed 64% after a 30% increase in revenue from 2005 to 2006. This also included a 37% increase in net income.
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A large portion of 1Q growth came from the company's Marketing Services division, which saw revenue increase 32% on the back of its AIR Miles Reward Program. Growth was also seen in the company's US platform for Marketing Services, Epsilon, which saw a 30% increase in revenues. Alliance Data acquired Abacus, a division of DoubleClick (recently acquired by Google (GOOG: Charts, News, Offers)), in a deal worth $435m in cash. The deal, announced in late December 2006, will match the data-driven Abacus systems with current ADS capabilities.
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The value of the deal with Blackstone will ring in at about $7.8bn, with the private equity firm picking up $1.1bn in debt. The ADS board wholeheartedly agreed to the deal, and urged shareholders to do the same in order to ensure that the deal is completed by year's end. Based on a Wednesday closing price for ADS of $62.96, shares are to be purchased at a 30% premium ($81.75). Blackstone is confident enough with the value of the company to offer a deal worth well above the earnings per share that ADS estimated in 2007, which itself was upgraded in April from $3.55 to $3.60 per share. The news of the acquisition has also boosted shares of ADS rival Canada-based Aeroplan Income Trust roughly 4.5%.
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Profile |
The Company's principal activities are to provide electronic transaction services, credit services and marketing services. The Company operates through three segments: Transaction services, Credit Services and Marketing services. Transaction Services provide card processing, billing and payment processing and customer care for specialty and petroleum retailers, customer information system hosting, customer care and billing and payment processing for regulated and de-regulated utilities and point-of-sale services. Credit Services provides private label receivables financing and securitize the credit card receivables that it underwrites from its private label programs. Marketing Services provides loyalty programs, such as the AIR MILES(R) Reward Program and other marketing services. During the year 2003, the Company acquired Exolink Corporation, Conservation Billing Services Inc and Orcom Solutions Inc and in Oct-2004, it acquired The Relizon e-CRM Company.
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