Heartland Payment Systems Inc. said purchasing Alliance Data Network Services LLC would significantly boost its transaction volume from gas stations and stabilize its revenue mix.
On Monday, Heartland said it would pay $77.5 million for the Alliance Data Systems Corp. processing unit, which is focused primarily on the petroleum industry.
"This acquisition immediately makes us one of the petroleum industry's leading processors," Robert Carr, Heartland's chairman and chief executive, said on a conference call. "It is a large and growing consumer nondiscretionary vertical, where we will be among just a handful of processors that control the great majority of total transaction volume."
His Princeton, N.J., acquirer and processor currently gets about 3% of its transaction volume from gas stations, but buying Alliance Data Network Services would raise that figure to about 25%.
Mr. Carr said petroleum is the largest merchant category for electronic payments besides groceries and is more immune to economic stress than the industries where Heartland is most active today. Restaurants currently contribute 39% of its transaction volume, but that figure would drop to about 30% after the acquisition.
"This more balanced mix of business will reduce the sensitivity of our portfolio to general economic conditions," he said.
Robert H.B. Baldwin Jr., Heartland's president and chief financial officer, said changing gas prices represent neither a risk nor an opportunity, since the contracts Heartland plans to take over are priced per transaction rather than being based on transaction size.
Mr. Baldwin also cited "adjacent opportunities" for building on Heartland's volume in the petroleum industry, especially in the Midwest, where gas purchases and grocery sales are frequently connected. "Convenience stores do lots of things" besides selling gas.
Mr. Carr said the acquisition should introduce Heartland to other industries where it has few customers, such as parking and phone top-up services.
Heartland and Alliance already do some business together — Heartland has 1,200 petroleum companies among its clients, many of which use a front-end payments system from Alliance Data Network Services.
"The constraints of using third-party platforms were an issue, and we frankly had trouble being cost-competitive," Mr. Carr said. By buying the Alliance Data unit, Heartland would get what he called a better product to sell while keeping costs in check.
The deal is expected to close late this month or early next month. Heartland plans to begin integrating the Alliance Data unit's back-end systems by the middle of next year, with front-end systems to follow in 2010 or 2011.
Jennifer Roth, a senior analyst with the global payment practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said Alliance Data Network Services would be a good fit for Heartland and "is really going to expand Heartland's customer base."
The deal will make them a bigger company, but not necessarily more of a threat to larger rivals, she said. "This will move them closer to the others, but it's not going to move them into the top five."
The deal is a bit more meaningful to Alliance Data Systems, since it demonstrates that the company is "changing the focus of the business away from the payment side" and more to marketing and loyalty, Ms. Roth said.
