Two of the fastest-growing processors of credit card payments for retailers are joining forces in a $1.3 billion deal.

Nova Corp. of Atlanta said Thursday it would buy PMT Services, Nashville, in a bid to be the top card processor for family-run grocery stores, gift shops, and other small retailers. Both companies have specialized in that niche.

"It creates a whole new kind of leader in the small merchant market," said Edward Grzedzinksi, Nova's chief executive officer.

Among processors serving all sizes of merchants, Nova would rank No. 4 after the deal, handling $40 billion in charge volume annually for some 350,000 retailers.

The deal comes amid accelerating consolidation in merchant processing, an unglamorous but essential part of the credit card industry. Processors make sure merchants get paid and send information about transactions to customers' banks.

First Data Corp., the industry leader, ushered in a new era of mergers in 1995, when it acquired First Financial Management Corp. for nearly $7 billion. That created the world's largest electronic payment processing company.

Since then midsize card processors have been gradually acquiring smaller independent sales organizations, or ISOs.

Nova and PMT have each been highly acquisitive. Combined, they have completed 130 transactions in the last six years, including portfolio and company acquisitions. They have also grown by cultivating their internal sales forces.

Nova ranked as the fifth-largest processor in 1997, with $24.5 billion in volume, according to the Nilson Report. PMT ranked 10th, with $16 billion.

By catering to smaller merchants, Nova and PMT can command larger profit margins than companies working with large retailers. Nova's strength has been in selling its services directly to banks, and PMT's has been in working through ISOs.

"We are enthusiastic about the market presence Nova will enjoy after the consummation of this transaction," said Richardson M. Roberts, CEO of PMT. "We believe one of the principal drivers of shareholder value in the coming years will be the substantial economies the merger should allow."

Under the deal, PMT shareholders would receive 0.715 shares of Nova common stock for each share of PMT common stock. Based on PMT's market capitalization of $1.1 billion, Nova would pay an 18% premium for the company.

If approved by regulators, the deal would close in October. Nova would then begin moving PMT's accounts-which are routed through multiple networks-onto its proprietary processing system. Mr. Grzedzinski said the conversion would take 18 to 24 months.

"Although we have consistently reduced our network costs as our transaction volume has increased, the relatively low cost of processing our accounts over the Nova network should represent a substantial cost-savings opportunity," said Mr. Roberts, who would remain CEO of PMT.

The new company would aim to generate 8,000 new merchant accounts a month.

First Union Corp. purchased a 30% stake in Nova in 1996. Nova also has alliances with KeyCorp of Cleveland and Firstar Corp. of Milwaukee.

"This is a huge deal," said Paul Martaus, president of Martaus & Associates, Clearwater, Fla. Those companies have "got the style, the grace, the vision, the army, the capitalization-and now they're paired up."

Mr. Martaus said converting PMT's patchwork system of authorizations and settlement to the Nova platform would be a challenge, but not an insurmountable one.

The enriched Nova processing network would cut costs for customers and "generate data-mining opportunities for the merchants signed to its networks," said David Robertson, president of the Nilson Report, Oxnard, Calif.

Ajay Varma, associate analyst at First Albany Corp., voiced concern over a $38 million restructuring charge Nova would take to absorb PMT, but said the deal would bring positive results.

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