The investment firm Welsh, Carson, Anderson & Stowe and Limited Inc., a retailer, have formed an information and transaction processing company for private-label credit cards.
The Dallas-based company, Alliance Data Systems Corp., was formed by merging two Welsh Carson properties - Business Services Holdings Inc. and World Financial Network Holding Corp., which owns The Limited's card issuing bank.
The company will process private-label card transactions for retailers, securing customer data at the point of sale, and provide cardholder statements for issuers.
The market for private-label processors is ripe for a new player to compete against longtime leader GE Capital Services. With 70 million accounts, GE Capital has a card portfolio more than twice the size of Citicorp's, doing its own processing for those accounts.
The Nilson Report, a card industry newsletter published in Oxnard, Calif., estimates that the more than 587 million private-label cards - roughly 43% of all U.S. credit cards - generated $77.5 billion in receivables last year.
"The new company will offer a broader product array than other large companies we compete with," said Ralph E. Spurgin, president of Alliance Data.
Alliance Data will "have an opportunity" to "have scale on both the acquiring and cardholder side," said David Robertson, president of The Nilson Report, and will be "a bona fide contender in an industry when bidding on new contracts."
Financial terms of the merger were not disclosed, but New York-based Welsh Carson will have a 60% stake in the transaction processing company, while the Limited will own 40%.
Earlier this year, Welsh Carson acquired a majority interest in World Financial Network, Columbus, Ohio., from the Limited for $165 million. It acquired Dallas-based Business Services Holding Inc. from J.C. Penney for around $100 million soon thereafter.
Anthony J. de Nicola, general partner for Welsh Carson, said Alliance will try "to create a business with scale economies to improve service offerings and profitability." The company estimates it will generate revenues in excess of $300 million in 1996 from more than 600 million transactions.
Alliance will "develop a relationship with retailers where we are more than just a traditional credit card processor," Mr. de Nicola said. The relationship will help retailers "derive additional revenues by developing customer card loyalty through data warehousing."
Richard Weingarten, a principal at Montgomery Securities, said Alliance's data base marketing efforts will mirror those of First Data Corp.'s USA Value Exchange, a data base marketing program for its general purpose credit card customers.
He said Alliance "will be a leader in the next (wave) in transaction processing, which is helping companies process information for marketing purposes and value-added services."
"We think that the companies that succeed in the future will understand data base marketing," Mr. Spurgin added, saying these companies will "know who their customers are, what works, which marketing dollars are in investments that change behavior, as opposed to just money you are spending."
Mr. Spurgin said Alliance will deal with larger retailers. Its current clients include Victoria's Secret, Abercrombie & Fitch, Saks Fifth Avenue, Charming Shoppes, Citgo, Total, Crown, and Fina.
Mr. Spurgin said Alliance is in "the final stages of an acquisition that will close during the first quarter of 1997."
A source close to the merchant processing industry said a likely acquisition target may be SPS Payment Systems, a Riverwoods, Ill., processor and issuer of private-label oil cards. An SPS spokesman said the company would not speculate on market rumors, and analysts who cover the company were noncommittal.
Cato Carpenter, an analyst with Alex. Brown & Sons Inc., noted that Dean Witter, Discover & Co. owns 80% of SPS, "so this would not be easy, except on a friendly basis."
Mr. Weingarten noted that SPS' stock has been depressed for months, making it a candidate for a takeover, and said the two companies would make a good strategic fit.
Alliance plans to have an initial public offering in the not too distant future.
"The intention is to do an IPO within the next three years, depending on how the market looks," Mr. Spurgin said.
"These guys are in it for the money," said Paul Martaus, president, Martaus and Associates, Clearwater, Fla. "The market is so open to IPOs, this would be a wonderful piece to take public."
However, he added "the marketplace isn't sure whether the time (for such an IPO) has peaked."