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With the vision of obtaining a pioneer position in digital agency, Alliance Data Systems Corporation (ADS - Analyst Report) will purchase Hyper Marketing ("HMI") group of companies. Alliance Data will pay approximately $460 million for the purchase.

The acquisition is expected to close by the end of 2012, pending customary closing conditions and regulatory approval.

Privately owned by Lake Capital and its affiliates, Chicago based HMI has approximately 1,100 employees mainly in Chicago, San Francisco and Wilton, Connecticut. HMI provides return on investment (ROI) based marketing services through Ryan Partnership, CatapultRPM, SolutionSet and Getmembers.com. Alliance Data will integrate HMI with Epsilon, provider of integrated direct marketing solutions, combining database marketing technology and analytics with a wide array of direct marketing services.

Alliance data expects the HMI buy to be accretive to GAAP and Core EPS in 2013. HMI is estimated to deliver $300 million in revenues and $50 million in EBITDA in 2013.  Additionally, its organic growth that remained in the high-single-digits on an average over the last few years is expected to reach almost 3 times the expected GDP growth trend.  As a result, revenue at Epsilon in 2013 is projected to surge to $1.3 billion. Moreover, the acquisition will help Epsilon's agency offering to augment by almost 100%.

With the addition of HMI, Epsilon will have brands including Mars, Unilever, The Home Depot, and Kellogg in its kitty. Moreover, HMI will enhance Epsilon’s digital capabilities to further develop primary digital channels including mobile, social, targeted display, tablet and web development. Epsilon already has 45 billion plus permission-based email circulations.

The last agency acquisition by Epsilon dates back to May 2011, when it acquired Marketing Holdings, Inc. On one hand, while Aspen added to automotive, telecom, and consumer product goods (“CPG”), HMI will add more scale and capabilities to CPG, telecom, retail and financial services. Alongside it will expand into other key verticals such as energy, fitness, quick service restaurants (“QSR”) and technology.

Marketing in North America is undergoing a transition to ROI-based targeted marketing from conventional advertising. Also, the annual spending is as big as $400 billion. ROI-based targeted marketing has equal weightage as conventional marketing and is projected to grow in the mid to high-single-digit rate annually.

Therefore, it is a prudent decision for Alliance to acquire assets that have ROI-based targeted marketing and thus solidify its position to capitalize on the opportunities offered by this segment of the market.

Mid of last month, Alliance Data reported its third quarter earnings results. Adjusted earnings of $2.34 per share were substantially ahead of the Zacks Consensus Estimate of $2.14 and augmented approximately 8.3% year over year. It also outperformed the guidance of $2.18.

Epsilon’s third quarter revenue declined 3% year over year while EBITDA increased 10% over the prior year. We expect the acquisition to help Epsilon to not only rebound from the decline but also continue to maintain robust EBITDA going forward, besides achieving management’s expectation of contributing about 33% to the overall top line in 2013.

Alliance Data currently caries a Zacks #3 Rank, which translates into a short-term Hold rating. With the optimism over its latest acquisition, we expect analysts to raise their estimates, providing an upward directional pressure on its Zacks Rank. Discover Financial Services (DFS - Analyst Report), which competes with Alliance Data, currently carries a Zacks #1 rank, implying a short term Strong Buy rating.

 

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