Alliance Data Systems Corp., an issuer of private-label credit cards for retailers, said Thursday that it had agreed to sell itself to the private equity firm Blackstone Group for $7.8 billion.
The price of $81.75 a share was a 30% premium to Alliance's closing stock price on Wednesday.
Alliance runs credit card programs for such retailers as Victoria's Secret, J. Crew Group Inc., Fortunoff, Crate & Barrel, Ann Taylor Retail Inc., and Crescent Jewelers Inc.
The Dallas company also supplies rewards programs and database marketing through its Epsilon unit, which has been one of the company's faster-growing businesses, and its Air Miles Reward Program in Canada. (American Express Co. and Bank of Montreal sponsor this program.)
It also has relationships with major banking companies. For example, it runs Citigroup Inc.'s ThankYou rewards program.
The deal with Blackstone is one of several recent acquisition agreements involving private equity firms and payments companies.
Last month, First Data Corp. in Denver agreed to sell itself to the private equity firm Kohlberg Kravis Roberts & Co. for $29 billion.
Also last month, Marshall & Ilsley Corp. in Milwaukee said it plans to spin off its payments unit, Metavante Corp., including the sale of 25% of the subsidiary to the private equity company Warburg Pincus LLC.
Shelley Whiddon, a spokeswoman for Alliance Data, wrote in an e-mail that the deal was in the best interest of stockholders and clients.
"Part of the rationale is evidenced through the purchase price … which clearly provides a significant return for our stockholders," she wrote.
Taking the company private will let Alliance Data Systems "focus even more intently on delivering robust solutions to its client base without the distractions and limitations often associated with being a public company," the company said.
Chip Schorr, a senior managing director at Blackstone, said in a press release: "Alliance Data is a true leader in loyalty and marketing solutions, and we believe that management's demonstrated track record of continued growth combined with Blackstone's investment expertise and industry experience will create a powerful partnership."
Blackstone declined to comment further.
Alliance Data Systems' board voted unanimously in favor of the deal, which is expected to close by yearend.
Rob Brown, the managing director of the businesses services group at Lincoln International LLC, an investment bank in Chicago, said that in the past two years Alliance Data has changed its focus from transaction processing to marketing.
In 2004, Mr. Brown said, well over 50% of Alliance Data Systems' revenue came from processing transactions on private-label cards. Today this share is down to about 45%, he said, and about 50% of the company's revenue comes from "opt-in marketing programs."
(Alliance Data Systems' marketing unit Epsilon bought the data mining company Abacus from DoubleClick Inc. for $435 million in February.)
The shift in focus has required Alliance Data "to make a pretty big investment to drive that growth and it's lowering their earnings," Mr. Brown said. "It's also another reason why this deal in particular lends itself to a leveraged buyout that can execute this growth outside the scrutiny of quarterly public earnings."
Lawrence S. Berlin, an analyst at First Analysis Securities, said the company is ahead of a lot of its competitors because it has been able to "intertwine" its rewards and marketing programs with credit card programs in order to build customer relationships.
"That made them very attractive to customers and obviously now to buyout firms," he said.
Perhaps the one issue that has most plagued Alliance Data is the credit risk of its private-label portfolio. The company's chargeoff rate dropped 74 basis points from its March level, to 5.15% last month. The average private-label chargeoff rate is 5.86%, according to Bloomberg data.
In a research note Wednesday, Cannon Carr, an analyst at Canadian Imperial Bank of Commerce's CIBC World Markets, attributed Alliance's relatively low chargeoff rate to its "targeting 700-plus FICO scores."
That is "good news considering where we are in the overall credit cycle," Mr. Carr wrote. "Recall that personal bankruptcies and mortgage defaults continue to climb higher this year."
But Roger Smith, an analyst at Fox-Pitt, Kelton, said the credit card portfolio "calls into question the valuation of the firm."
"Being a private company, they don't have to explain themselves to investors continuously about the credit metrics," he said.
Tien-Tsin Huang, an analyst at JPMorgan Chase & Co., wrote, "Our preliminary analysis suggests the deal works for someone comfortable lever[ag]ing up and harvesting the cash flows" of the card portfolio, "which generates low-teen net interest margins, by our estimate." The portfolio "is more valuable to a private owner that could shed noncore assets … and collect the recurring cash flows of the credit business while leveraging the domestic marketing capabilities."
Ms. Whiddon, the Alliance Data spokeswoman, said the First Data deal had not influenced "Alliance Data's decision to be acquired by Blackstone."
But Mr. Smith said the deal is clearly part of a trend. "I think that private equity firms are awash with capital," he said, "and you're going to see more of these transactions. I would be surprised if this was the last private equity transaction in the payments space."
Mr. Berlin agreed that the deal is part of a "snowball effect," but "the snowball is nearer the bottom of the hill than the top of the hill," he added.
Though a number of companies could still be bought in the payments sector - including Total System Services Inc.; Heartland Payment Systems Inc.; CheckFree Corp.; and EFD/eFunds Corp. - "you don't have many more choices," Mr. Berlin said.
