Transactive Corp., one of a handful of companies in the burgeoning business of electronic benefits transfer, is up for sale, and Citicorp is the likely buyer.
Sources close to the negotiations say Citicorp's benefits processing unit, which has the lion's share of the nation's EBT processing contracts, is eager to remove its largest rival and extend its domination of the market.
Such a deal would add Texas, Illinois, and Indiana to the 30-state benefits-processing empire already controlled by Citibank EBT Services Inc., which is based in Chicago.
Transactive's parent company, Gtech Holdings Corp., is looking to pull the plug on what has turned out to be a money-losing venture.
If the deal goes through, Citibank would no longer face major competition in the business of electronically processing welfare payments, food stamps, and other government benefits.
Under the 1996 welfare reform law, all states must have an operating EBT system in place by 2002, and most states are now busy setting theirs up.
Observers say the potential sale could raise antitrust concerns. And a money-losing operation in Texas has reportedly become a sticking point in the negotiations.
Transactive, which was formed in 1994 and lost $20 million in its first year, has been beset by a variety of problems that speak to the riskiness of the EBT business. In negotiating a contract with a state or group of states, processors are betting that the revenue generated from the caseload of benefit recipients exceeds what they pay out to funds transfer networks to handle the transactions and other costs.
But welfare caseloads in Texas have declined sharply, costing Transactive both business and revenue.
When Transactive signed the Texas contract in February 1994, there were 2.7 million food stamp recipients in the state. Welfare reform and a thriving economy helped that number dwindle to 1.8 million, according to the Texas Department of Human Services.
Neither Citibank nor Transactive would comment on the potential deal, and sources following the negotiations refused to estimate a price for the ailing company.
Gtech, the lottery company of West Greenwich, R.I., has stated its interest in shedding the unit. In a quarterly filing with the Securities and Exchange Commission, Gtech said it was "aggressively considering various alternatives" for Transactive, including "selling the entire business."
"They are motivated to close a deal as quickly as possible," said an industry executive. "They want to stop the bloodshed in Texas."
Sources said Citibank has all but accepted taking over Transactive's contracts with Illinois and Indiana. Texas, where Transactive is losing money by the day, is now the only stumbling block.
"If it were not for Texas, it would probably be announced already," said one source. Talks are centered on "trying to see if Citi can assume that contract, and if or how it can be renegotiated."
In an effort to recoup some losses, Transactive recently threatened to sue Texas unless it paid the company $2.1 million per month. Texas had offered to pay $1.6 million a month and add caseload volume for Transactive-like food and work subsidy programs-as long as Transactive agreed to certain conditions.
But Texas withdrew its offer, and negotiations have stalled. Texas and Gtech have already clashed recently over the terms of the state lottery.
Citibank is looking at the EBT business as a long-term investment. Though the Texas contract is not a money-maker, it might be in the future, and Transactive has already absorbed the costs of installing systems, call centers, and terminals.
Citibank has other reasons to want to acquire Transactive. For one thing, the Austin, Tex. company has filed lawsuits and lobbied aggressively over the years to try to wrest EBT contracts from Citibank.
Litigation has become a fact of life in the EBT world. Last year Deluxe Electronic Payment Systems, a subsidiary of Deluxe Corp., lost a $30 million lawsuit to Mellon Bank Corp. over breach of contract in an EBT case. Deluxe holds EBT contracts in five states, and works with Citibank in other state contracts.
The market is also a nascent one, in which many states have yet to come on-line. Though the Texas contract is the largest agreement with a state in terms of caseload operating on-line, New York and California have even bigger welfare rolls. New York plans to start issuing cards by the fall; California is awarding contracts county-by-county.
Transactive executives have not been the only ones raising eyebrows at Citibank's dominant market share.
"There's a fair number of people who bid for this business," said one Washington-based antitrust lawyer. But "if I were Citi, I'd gear up for a strong presentation to the" federal agencies.