Deluxe Corp., the nation's largest check printer, said it plans to shed the merchant processing subsidiary it acquired two years ago.

The unit, called Financial Alliance, processes MasterCard and Visa transactions for "mom and pop" merchants.

John J. Leehy 3d, president of the Louisville, Ky., processor, said executives of Financial Alliance and Deluxe have been discussing a "classic management buyout." The talks are fairly advanced, he added.

"We are exiting the business because we are such a small player" in merchant acquiring, said Stuart Alexander, a Deluxe Corp. spokesman. "There is little likelihood that we would grow Financial Alliance to be an industry leader in the processing end of the business."

Analysts said the pending sale is consistent with the business plan of J.A. "Gus" Blanchard, president and chief executive officer of Deluxe. He was hired less than two years ago and charged with returning the St. Paul company to profitability.

Financial Alliance was founded in 1992 and was bought by Deluxe for $50 million three months before Mr. Blanchard was hired.

Until this year, Deluxe has "seriously underperformed," said Edwin C. Ciskowski, an analyst at Cleary Gull in Milwaukee.

He added that Mr. Blanchard would "rid the company of things that don't meet their idea of core competencies or units they can operate profitably."

Since 1992, when Deluxe traded in a range from $38.13 to $49 a share, the stock has taken a pounding. In 1995 when Mr. Blanchard joined, the trading range was $25.75 to $34.

In the latest 52 weeks, Mr. Ciskowski said, the stock "has exceeded Wall Street expectations." The trading range has been $26 to $39 per share.

In a report last month to securities analysts and portfolio managers about plans to restructure Deluxe, Mr. Blanchard indicated he would sell "nonstrategic" units, including Financial Alliance.

Mr. Ciskowski said Deluxe would turn its focus to financial institution services, through its Milwaukee-based Deluxe Data Corp. subsidiary. The company's point of sale, automated teller machine, electronic benefits, and funds transfer processing arm brings in about $150 million to $200 million a year of revenues.

The merchant processing business is competitive, the analyst said, and requires large amounts of capital to create scale. This would be "dilutive" of Deluxe's long-term goals, he said.

From Financial Alliance's viewpoint, Mr. Leehy said, it is "a fabulous time to be in" the merchant processing business and the company is "well- positioned for continued growth."

The Nilson Report, an industry newsletter in Oxnard, Calif., ranks Financial Alliance eighth-largest among nonbank processors. It is processing more than $2.7 billion worth of Visa and MasterCard transactions at an annual rate, for more than 58,000 merchants.

Noting the challenges posed especially by much larger players like First Data Corp., Mr. Leehy said cost-effective distribution for smaller merchants is essential.

"What really matters is feet on the street," he said. "We have tremendous market coverage, which equates to the continued production of new business."

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