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Total System to Buy NetSpend

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On Tuesday, global financial services provider Total System Services Inc. (TSS - Free Report) announced its pact to acquire leading prepaid debit card provider NetSpend Holdings Inc. for $1.4 billion. The deal is scheduled to culminate by mid-2013, once the regulatory compliances are fulfilled.

Accordingly, Total System offered the deal value at a 30% premium to NetSpend’s closing price of $12.29 on Tuesday, which aggregates to $16 per share. Excluding the expenses related to the transaction, the acquisition is likely to be accretive within the first year of completion.

The acquisition of NetSpend will not only diversify Total System’s business basket but also help it penetrate deeper into the electronic financial services market. According to First Annapolis Consulting, this market is projected to grow at an annual rate of 20% in the next 4 years.

With over 2.4 million accounts, 500 retail distributors and 130,000 reload locations; NetSpend holds a wide distribution network for its prepaid cards. The company also offers corporate payroll card solutions through its strong online, mobile and direct marketing channels.

Hence, the acquisition is expected to complement Total System’s long-term growth strategy of inflating its top-line growth through a diversified portfolio. The addition of this rapidly growing prepaid card business will accentuate the company’s operating and competitive leverage, as this card segment is beyond the stringent regulations that are faced by the credit and debit cards.

The Inorganic Growth Strategy

Total System continues to develop and enhance its processing solutions by developing solutions and strategic acquisitions to expand its service offerings. Thus far, most of the company’s acquisitions were in the merchant acquiring space.

In 2011, the company acquired the whole of First National Merchant Solutions LLC (FNMS), TermNet Merchant Services and Vanguard Payment Systems Inc. under its brand TSYS – Merchant Solutions (TMS). Last year, Total System also bought a 60% stake in Central Payment Co. LLC and acquired ProPay. We believe that the new acquisition should further help perk up growth of the company.

While Total System holds a healthy balance sheet and operating cash position at the end of 2012, the deal-value could impel the company to raise debt. This may have certain negative implications on the company’s financial leverage at least for some time. Hence, we remain on the periphery to analyze the future developments in this company.

Currently, Total System carries a Zacks Rank #2 (Buy). Some more stocks in the same financial services sector carrying the same Zacks Rank include Visa Inc. (V - Free Report) and Global Payments Inc. (GPN - Free Report) .

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