TSYS' quest for independence

It's been contemplated casually for years, scrutinized seriously for months and studied formally by a special committee since late July. Now, it appears, Synovus Financial Corp. is poised this week to cut the proverbial apron strings from a credit-card processing offspring that has grown from $15 million in revenue at its publicly traded birth in 1983 to nearly $1.8 billion in revenue last year at age 23.

A decision could come by Thursday on whether or not TSYS, incorporated as Total System Services, should be spun off as an independent company from Synovus, a regional bankholding firm with Columbus roots dating to 1888.

Both companies were hesitant to comment Friday on the potentially historic moment.

"Neither Synovus or TSYS are going to make any further comment publicly about spin-related issues until the committee and the board have concluded their work and they are ready to announce a decision," said Alison Dowe, director of communications at Synovus.

Management is playing the decision very close to the vest, with U.S. Securities and Exchange Commission regulations prohibiting any advance signals or insider information that might influence either firms' stock price.

But those watching the scenario unfold are betting Synovus and its board of directors will pull the trigger on a corporate spinoff that could yield nearly $5 billion for TSYS to grow its business, particularly overseas.

"I think it's likely, but that's just a gut feeling," said David Robertson, publisher of The Nilson Report, a California-based periodical that tracks the card-processing industry in which TSYS is involved.

"I think it's always a good move when a company that's got as much on the ball as TSYS does to get out from underneath a parent company that sometimes has other interests in mind," he said.

Investment securities and management firm Stifel Nicolaus & Co. has been tracking the spinoff deliberations and how such a move might impact Synovus and TSYS.

John Shinkle, senior vice president and manager of Stifel's Columbus office — and a former Synovus securities broker — said he expects a spinoff to occur. He also said interest in the topic has been extremely high in the community ever since Synovus announced on July 24 that a special committee would study the issue and make a recommendation.

"It's the talk of the town," Shinkle said. "Everybody's waiting to see what it's going to be. And, then, what does it mean once they do it is the next question."

Stifel Nicolaus analysts Tony Davis and Ed Timmons, in a research report dated Sept. 17, laid out several possibilities that could result from a spinoff.

For Synovus, which now owns 81 percent of TSYS stock, it could lead to a cash infusion of an estimated $324 million from a one-time dividend payout to shareholders, the report said.

The company could use the money to purchase small to mid-size banks in the Southeast to strengthen its five-state footprint. Or the firm might use the proceeds to buy back up to 10 million shares of its own stock, boosting 2008 earnings per share by 2 cents.

Some analysts have suggested Synovus could be a takeover target in a post-spin scenario world in which the banking firm's stock market value drops from about $9 billion now to under $5 billion.

"Our analyst thinks with the additional capital that they're going to get from TSYS that they're more likely to go out and potentially buy some other medium-sized Southern banks," Shinkle said.

For TSYS, the Stifel Nicolaus report said, a spinoff could theoretically bring it about $4 billion in cash from being able to sell its former Synovus-owned stock to the public. A research report from investment firm Credit Suisse, meanwhile, puts the stock potential at $4.8 billion.

TSYS, facing a maturing credit-card processing market in the United States, would likely use the new money to fund its expansion overseas, where profit margins are higher. The company already is doing brisk business in Europe and is trying to develop markets in Latin America, South America and the Asia-Pacific area, including China, which will host the 2008 Summer Olympic Games.

Robertson said opportunities for TSYS go beyond simply buying out other firms. It could "partner" with telecommunication firms and other entities, enabling it to get into payment processing with consumers using items such as phones and key fobs.

"So the question is, what will happen — and it's completely speculative — once TSYS is a stand-alone company," Robertson said. "But I think it needs to be a stand-alone company so that it can form the partnerships that it was prohibited from forming when it was owned by a bankholding company."

The timing of a spinoff could prove dicey for Synovus, however. The bank would essentially be cutting about 30 percent of its profit flow with a TSYS divestiture.

And such a move would come with the banking industry overall under intense pressure from slowing loan growth, worsening consumer credit and a hemorrhaging mortgage market. Bank of America, SunTrust and Wachovia all reported earnings declines last week.

Investment firm Raymond James & Associates recently lowered slightly its 2007 and 2008 earnings per share estimates for Synovus based on the eroding banking climate.

"We believe Synovus' interest rate sensitivity position and real estate dependent growth model does not dovetail well with the current environment," Raymond James research analyst John Pandtle wrote in an Oct. 4 report.

Shinkle calls the timing "horrible" because of the worsening banking fundamentals. He said Synovus really could use the card processor's fee income more than ever to maintain a steady earnings flow and keep shareholders happy.

In his most recent public remarks about a spinoff, at a Lehman Brothers conference in mid-September, Synovus Chairman and Chief Executive Officer Richard Anthony pressed home two major points — Synovus' desire to increase its visibility in the Atlanta and coastal Florida markets, and the need for TSYS to expand its reach around the globe.

Both require major amounts of money.

"We'll continue to get strong high single digit organic growth," he said of TSYS. "But our future needs to be broader than that."

Thus leading to the issue of TSYS' ownership structure and its ability to use its own stock as currency for strategic acquisitions.

At the financial conference, Anthony said he had no reason to believe a spinoff decision — one way or the other — will not be reached by the time Synovus releases its third-quarter earnings report Thursday. (TSYS issues its report today.)

The Synovus board of directors has the final say on the matter of TSYS achieving its independence.

"I feel good about everything that's happening there," the CEO said. "And we're moving in an orderly fashion toward a decision."