If you haven't heeded my constant browbeatings to keep a close eye on the financial services sector, then you're getting a rude awakening today. Electronic payment processor Total System Services (NYSE:TSS), also known as TSYS, agreed to purchase prepaid debit card and payroll card company NetSpend Holdings (UNKNOWN:NTSP.DL) for $1.4 billion, or $16 per share -- a 26% premium over yesterday's closing price.
The deal works out as a win-win for both parties, as TSYS gets access to the rapidly growing and still largely untapped domestic prepaid debit card market, and NetSpend gets the financial backing that it was lacking as bigger names like American Express (NYSE:AXP) and JPMorgan Chase pushed their way into the market.
Another aspect of this deal that might appear lost on investors but shouldn't is that Green Dot (NYSE:GDOT) shareholders can now breathe a sigh of relief and Safeway (UNKNOWN:SWY.DL) shareholders can salivate even more.
Green Dot suffered through a disastrous 2012, plummeting by 60% in July after missing and lowering its earnings estimates as competition in the prepaid sector began heating up. Both Green Dot and NetSpend would be hammered a few months later by American Express, which teamed up with Wal-Mart to introduce the Bluebird prepaid debit card. Entering 2012, Wal-Mart accounted for the lion's share of Green Dot's revenue. With a deal now in place for NetSpend, you can bet that Green Dot's going to strut its stuff and attempt to lock in a few more deals with retailers in an attempt to draw the attention of a larger suitor. This is the adrenaline shot in the arm that Green Dot shareholders needed.
For Safeway, it could add even more value and investor interest to its proposed spinoff of its gift-card subsidiary, Blackhawk Network Holdings, which is expected to occur in the first half of 2013. Blackhawk sold $6.9 billion in gift cards in 2011, a 25% improvement over the previous year, and netted an average fee of 9% per card according to a report from The Wall Street Journal. Given Blackhawk's numerous strategic partners, analysts at financial firm Janney had projected a valuation of $936 million. Given the NetSpend premium, that may be $1 billion or more when it eventually does go public.
The financial services sector is growing by leaps and bounds. From processing to prepaid debit, payroll, and gift cards, this is a sector that demands your attention. Not paying attention to the explosion of growth projected in this sector both domestically and internationally is just plain nuts!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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