Synovus Financial Corp. is facing another round of questions from Wall Street analysts over its plans for the card processor Total System Services Inc., with renewed speculation of a spinoff.
TSYS has traditionally been crucial to Synovus' bottom line, and it accounted for more than 30% of the Columbus, Ga., banking company's first-quarter profit. In recent months, however, executives have said TSYS is going through a "time of transition."
In May the unit lowered its guidance for 2007 earnings, due largely to the loss of key accounts from Bank of America Corp. and Sears, Roebuck and Co. Its shares are down 24% from a year ago.
In recent weeks analysts have suggested anew that Synovus spin off its 81% stake in TSYS amid ongoing concerns about consolidation in the credit card industry. But they are divided on whether a spinoff would happen soon or further down the road.
Anthony Davis of BankAtlantic Bancorp's Ryan, Beck & Co. Inc. wrote in a research note to clients last week that given that Synovus had not discussed the possibility of buying TSYS stock despite its depressed price, it could be considering a tax-free spinoff.
Nancy Bush of NAB Research LLC said in an interview last week, "Frankly I'd like to see them cut the ties and spin it off." The unit's problems are overshadowing progress in Synovus' banking operations, she added.
But Ms. Bush and others said they doubt a spinoff is near.
"I don't sense that it will happen yet," Ms. Bush said. "I think they're still sort of wishing and hoping that things at TSYS will return to their historic growth rates."
A spinoff might be logistically difficult, Ms. Bush said. "You have such an interlocked management group and board," she said, and removing TSYS could hurt Synovus' market capitalization and its chances to make bank acquisitions.
Michael Mayo of Prudential Equity Group LLC wrote in a May 25 note to clients that a spinoff "seems less likely" in light of revenue weakness at TSYS. He said his discussions with Synovus executives gave him no impression that a spinoff was imminent.
A Synovus spokeswoman said Monday that the company would not comment on analyst speculation. In late April, its president and chief executive, Richard Anthony, preempted the inevitable spinoff question during a presentation at the Gulf South Bank Conference in Atlanta.
"We have always said … that we were open to the change in ownership of TSYS if strategic opportunities favored it," Mr. Anthony told the audience. "That might include a spin-out. That might even include a buyback. … We will continue to look at the opportunities here but manage for the long-term shareholder value."
(Executives at Marshall & Ilsley Corp. are repeatedly asked a similar question about Metavante Corp., the Milwaukee banking company's technology subsidiary. And the response is similar - they will not rule out selling Metavante, but they are quick to add that they like the subsidiary.)
John A. Pandtle of Raymond James & Associates and Todd Hagerman, of Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc. both say that a spinoff of TSYS would make sense but that they don't think it will happen soon.
TSYS could be a drag on Synovus' earnings, Mr. Pandtle said. The parent company's stock is down 8.7% from a year ago despite improvements in its banking operations. First-quarter net income excluding TSYS rose 18% from a year earlier, to $93.8 million; including TSYS, the increase was 15%, to $134.5 million.
"There is more discussion about a spinoff, and the sentiment is clearly shifting towards support of doing so … but expecting them to spin it out just to spin it out doesn't make a lot of sense," Mr. Pandtle said.
Mr. Hagerman said that much of the premium valuation that Synovus had gained from TSYS "has evaporated" in recent years. A spinoff might encourage investors who are wary of TSYS to invest in Synovus, and could even lead to speculation of a Synovus sale, he said.
Despite tempered expectations for next year, TSYS continues to make money; its 2007 revenues are still expected to top $1 billion and its earnings are projected to be at least $200 million.
And it's gaining new business. Capital One Financial Corp. will start shifting its card portfolio to TSYS this year, and TSYS recently signed a processing deal for Wachovia Corp.'s fledgling credit card business. TSYS has also projected that the revenue contribution of its international business will grow from 19% now to at least 30% by 2011.
Phil Tomlinson, the unit's chairman and CEO, has touted its new contracts and longer-term initiatives, including a minority stake in China UnionPay Data Co. Ltd. "We feel good about our future," he said at TSYS' May 25 analyst day. "We have lost a huge amount of business, but we're making it up and we're making it up fast."
