First Now Tagged with Total System - Analyst Blog

Expanding its merchant service solutions, on Tuesday, Total System Services Inc. (TSS) announced the purchase of the remaining 49% of First National Merchant Solutions LLC (FNMS) for approximately $169.6 million. The deal culminated on January 1, at the onset of 2011.

Previously, in March 2010, Total System had signed an investment agreement with First National Bank of Omaha (FNBO) in Nebraska, pursuant to which the parties entered into a joint venture arrangement. This joint venture helped Total System acquire a 51% stake in the newly formed company, named FNMS, for approximately $150.5 million, in April 2010. FNMS is the name under which FNBO currently conducts its merchant activities.

However, following the complete acquisition, Total System has renamed FNMS as TSYS Merchant Solutions. With a bank card portfolio of 3 million accounts on file, this merchant solution business provides transaction processing, merchant support, credit underwriting, risk management and other services, including prepaid cards of high-end brands such asVisa Inc. (V) and MasterCard Inc. (MA), to all sizes of business.

Further, FNMS has a strong 57-year old operating history in the merchant acquiring industry, which will help boost Total System's market share and its long-term growth strategy that also includes business diversification.

The company's joint venture with the FNMS is expected to be accretive to earnings in 2011 and beyond. Moreover, the 51% stake acquired previously was projected to add $95-$97 million to the revenues and about $2-$3 million to the net income in 2010. Total System is expected to provide further details of the acquisition during its fourth quarter earnings call, scheduled on January 25.

Earnings Round Up

Although Total System's third quarter operating earnings of 25 cents per share were a nickel behind the 30 cents reported in the year-ago quarter, earnings were a couple of cents ahead of the Zacks Consensus Estimate of 23 cents per share.

Results reflected lower-than-expected revenues and higher-than-expected cost of services and selling, general and administrative expenses that also led to the decline in earnings. These were partially offset by increased same client transactions and slight increase in overall transaction volume.

Overall, TSS signals a sluggish near-term outlook, given the inefficient cost-cutting efforts, consumer de-leveraging and currency risk. Moreover, the company has been adversely impacted by bank consolidation and the slowdown in credit card transaction growth over the past few years.

We expect to see incremental costs and risks for TSS as a result of the CARD (Credit Card Accountability, Responsibility, and Disclosure) Act of 2009, which was signed into a law in July 2010. However, we expect Total System to benefit from the improving economy and generate healthy cash flow to achieve the guidance for 2010. Based on the near term cautious outlook, the Zacks Consensus Estimate for fourth quarter is projected to be 24 cents per share, which would be down by about 22% from the year-ago results. We continue to maintain a Neutral recommendation with a Zacks #3 Rank, on the stock.

 
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