Heartland Payments Systems Inc., a Princeton, N.J.-based payment processor, is buying the Network Services business of Dallas-based Alliance Data Systems Corp. for $77.5 million, Heartland announced this week.
The deal, which observers expect to close by early June, would boost Heartland petroleum-industry processing transactions. Today, petroleum accounts for 3% of the processor's volume, but that figure would soar to 25% after the companies integrate, making the category Heartland's second-largest vertical market.
Restaurants now account for 39% of Heartland volume, which is the largest share. After the deal, restaurants would contribute 30% of the company's volume.
"This acquisition immediately makes us one of the petroleum industry's leading processors, Robert Carr, Heartland chairman and CEO, said Monday during a conference call with analysts.
Industrywide, petroleum is the second-largest processing-industry vertical behind the grocery business, Carr says. Petroleum commands nondiscretionary spending, he says, adding that "we will be among just a handful of [petroleum] processors that control a great majority of total transaction volume."
Carr also expects the diversification in the types of merchants that comes with the acquisition to reduce Heartland's exposure to big swings in the economy.
In 2007, Network Services processed 604 million transactions worth $17 billion in bankcard volume, Heartland says. Heartland handled $51.9 billion in total card volume that year. Additionally, Network Services had another 2.6 billion authorization transactions.
Those additional transactions put Heartland into a better bargaining position with telecommunications companies, Carr said.
"With 4 billion transactions we get a lower per-unit cost than with 1.2 billion transactions, and that's a significant part of the synergy in this deal," he says. "We're going to be using our own gateways, our own lease costs [and] call routing system. So the investments we have made in the past are paid off big time with this acquisition. Our sales organization is very happy about having a marketplace that we can compete [in] effectively, like we do in restaurants."
Pumping up sales
Heartland expects to hire the 35 salespeople now working for Alliance Data's Network Services business.
Heartland acknowledges that Network Services clients differ from most of Heartland's merchant customers. The top 10 Network Services customers represent approximately 75% of the enterprise's revenue, Robert Baldwin Jr., Heartland president and chief financial officer, said during the conference call.
"We're deeply aware of the different kind of sales that these large accounts represent, and we are thinking about how to pay people," Baldwin said.
Large accounts have a longer sales cycle, he said, and Heartland does not plan to change the compensation model for the Network Services salespeople.
"We would not expect to even think about putting this group of people under the traditional Heartland [compensation] model," Baldwin says. "That's not what they have today and not what makes the most economic sense for either us or for the salesperson."
The larger challenge for Heartland is integrating the Network Services payment technology into Heartland system, he says. "There is no question the integration of the technology is a huge project, and we take it very seriously," Baldwin says. "We're going to be looking to what we believe is a very talented team of [information technology]staff that will be coming with the deal from Alliance who know their systems and their connectivity deeply. They will be essentially matched up with our people who know how to run our platforms, and that's what will be used to migrate their platforms over to ours."
Carr says the front end, where consumers initiate transactions, will require the most effort to integrate because Heartland's back end, which handles transactions after authorization, already is well developed.
million-merchant march
"We need to expand the capacities, but the software infrastructure and the architecture of our systems was designed to handle this," Carr says. "We had plans to be a big processor, at some point. We've been out on our million-merchant march. This gets us a little bit closer with an additional 71,000 locations."
The front-end modifications are more difficult to make because of the dial-up payment terminals some merchants use, "not because of the transactions from inside the stores but from the pump controllers," he says. "We don't have any connectivity with the pump controllers on our current front end."
Heartland plans to work gradually at the task of switching each technical element of the Network Services network to Heartland's system, Carr says.
