Fears of what the possible sale of Sears, Roebuck and Co.'s credit card business would do to its payments processor, TSYS Inc., are overblown, many analysts say.
Shares of the processor lost as much as 6.6% on Wednesday amid heavy selling after the giant retailer said it was considering "strategic alternatives" including the sale of its $30.8 billion credit card portfolio. Investors worried that such a sale could cost TSYS one of its largest customers.
Analyst Timothy W. Willi of A.G. Edwards in St. Louis downgraded the Columbus, Ga., processor to "hold" from "buy" after the news, saying in a research note, "We don't see any upside for TSYS in this situation." Mr. Willi also said the shares had become overvalued compared to those of peers.
The contract with Sears, of Hoffman Estates, Ill., accounts for 7% to 10% of TSYS' profits, analysts said. TSYS, in turn, provides half the revenue and more than a quarter of the profit of Synovus Financial Corp., also of Columbus, which owns 81% of its stock.
On Friday analyst Jason Goldberg of Lehman Brothers in New York lowered his rating on the banking company to "underweight" from "equal weight," though he said in an interview that Sears played only a "little part" in his decision.
Shares of Synovus, which also fell Wednesday, had already been under pressure earlier in the week. By late Friday they and TSYS shares had both regained much of the ground they had lost.
TSYS closed Friday up 6% to $15.57 from Wednesday's lows. Synovus, which typically trades at a premium to most bank stocks because of its stake in the processor, were up 2% from a low of $17.80 on Thursday, though down 10.7% from a week earlier.
Many analysts believe the chances are slim that a buyer of the Sears portfolio would drop TSYS. For one thing, the portfolio is among the largest in the country, and a change could be difficult, they said.
Also, Sears is in the third year of a 10-year contract with TSYS. If a buyer wanted to switch processors, it would need to buy out the contract - and analyst Bradley Moore of National Bank of Canada's Putnam Lovell NBF Securities Inc. said the terms would be "onerous."
Finally, the list of potential buyers of the Sears portfolio includes several companies that are also TSYS customers, making a switch unlikely.
"Frankly, in the longer run we're not really convinced that there's going to be much of an impact for TSYS," Mr. Moore said in an interview.
A TSYS spokesman, Eric Bruner, said the company is "monitoring the situation closely."
Sears "has been an important client of ours since 1998," he said. "We currently have seven years remaining in a 10-year processing agreement with Sears, and the contract does have appropriate exit remedies for TSYS if Sears chooses an early termination for any reason."
Analysts said those remedies make it unlikely that a new owner would switch without good reason. "There wouldn't be any compelling reason for the new owner to make a change," Mr. Moore said. "It's really a non-issue."
General Electric Co.'s GE Capital, Citigroup Inc., and HSBC Holdings PLC, none of which is a TSYS customer, are all considered likely contenders to buy the Sears business, which is the eighth-largest U.S. credit card portfolio. It includes $18.4 million in receivables for the company's proprietary card, the Sears Card, as well as $12.4 billion in MasterCard receivables. But other potential buyers include Bank One Corp., which recently signed a processing and software contract with TSYS; and Bank of America Corp., which is one of its largest customers.
Besides worrying about the Sears contract, Mr. Goldberg said he was "disappointed that the recent pact with Bank One will contribute only a "modest" 4 cents per share to TSYS earnings next year.
Mr. Goldberg said that though TSYS is a concern, other factors - such as slow loan growth, rising nonperforming loans, and shrinking profit margins because of low interest rates - weighed more heavily in his rating cut.
