The stock of TSYS suffered a major shock Wednesday, a day after an overall solid earnings report and news that the company is buying a firm called TransFirst for $2.35 billion.
Shares plunged just after the opening bell on the New York Stock Exchange and never recovered, losing $6.78 apiece to finish the day at $39.22 per share, a nearly 15 percent drop from Tuesday’s closing price of $46.
Much of the damage appeared to come from the high price paid by Columbus-based TSYS for Hauppauge, N.Y.-based TransFirst, which is being purchased from San Francisco-based private equity firm Vista Equity Partners.
A report issued Wednesday by Deutsche Bank research analyst Bryan Keane said the TSYS purchase of TransFirst — which serves small- to medium-sized merchants, helping them set up and conduct transactions — came at a “significant premium” over the $1.5 billion paid by Vista Equity just over a year ago, in October 2014.
TSYS “plans to fund the acquisition by raising debt,” the Deutsche Bank report noted, which will impact overall financial numbers moving forward. Some of that drag will be offset by “cost synergies” realized by TSYS bringing TransFirst into the fold. Those synergies, or savings, could total $15 million in 2017 and possibly double that by 2018.
“The acquisition will propel TSYS to No. 6 acquirer in the U.S. and accelerate revenue growth for merchant segment to high single digits due to increased presence in strategic channels including integrated payments and ecommerce,” the report said, calling TransFirst a “high quality” company.
Deutsche Bank, which continued its “hold” rating on TSYS stock after Tuesday’s news, also said the credit-card and payment processor’s North America revenue growth numbers are “expected to slow” noticeably this year due to the absorption of the major Bank of America card portfolio into the TSYS pipepline. Two card portfolio deconversions from lost client business also will put pressure on revenue, it said.
TSYS also said it will limit its repurchases of common stock shares, as well as more merger and acquisition activity, until TransFirst is operating fully within the Columbus firm. The acquisition is expected to close in the second quarter (April-June) of this year, pending regulatory approvals.
One other piece of the puzzle that possibly contributed to Wednesday’s selloff of TSYS stock was the profit numbers disclosed the day before. The company reported diluted earnings per share of 45 cents in the quarter, up from 43 cents in the October-December period the year prior. However, adjusted earnings per share — which typically don’t include one-time gains, losses and expenses — came in at 57 cents. Wall Street analysts were expecting a consensus 60 cents per share.
TSYS addressed the debt publicly Wednesday in a filing with the U.S. Securities and Exchange Commission. The company said it will be lining up a $2 billion, 364-day bridge term loan to finance the acquisition, provided it doesn’t find “alternative” financing before the closing date.
Either TSYS or Vista Equity Partners can terminate the purchase agreement under various scenarios, the SEC filing says, including if the acquisition closing hasn’t taken place by July 24 of this year.
Various financial and legal firms helping to finalize the major acquisition by TSYS of TransFirst include Bank of America, Merrill Lynch, GCA Savvian Advisors, First Annapolis Consulting, King & Spalding LLP, Credit Suisse, Goldman Sachs, J.P. Morgan and Kirkland & Ellis.
In its Tuesday earnings report, TSYS posted a profit, or net income, of $82.8 million in the fourth quarter of 2015, up 3.7 percent from $79.8 million in the same period a year ago. For 2015 as a whole, it racked up a profit of $364 million, a nearly 13 percent increase from $322.8 million in 2014.
TSYS Chairman, President and Chief Executive Officer Troy Woods, discussing the TransFirst purchase Tuesday, said the merchant specialty company is a great fit for his own firm and will yield solid and consistent revenue and income in the future. He also said pulling the trigger on the buyout is a necessity.
“At the end of the day, TSYS needed to enhance its merchant business in order to remain competitive in the rapidly changing acquiring landscape,” Woods said.
The TransFirst deal, after it closes, will be the largest purchase of another company by TSYS in its 33-year history. The global processor paid $1.4 billion in 2013 to acquire Austin, Texas-based NetSpend, a company that markets and sells prepaid cards, often for those with no bank accounts.
NetSpend contributed $24.3 million in gross dollar volume to the TSYS revenue pipeline in 2015, according to Tuesday’s earnings report, which was up nearly 20 percent from $20.3 million from 2014.
The 52-week trading range for TSYS stock is $34.63 to $56.67 per share. Deutsche Bank on Wednesday, even with its hold rating, had a price target of $53 per share for the Columbus company.