Is Green Dot Cheap Based on the NetSpend Buyout?
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After last writing about Green Dot (NYSE: GDOT) as a potential winning stock based on the new mobile banking platform, the stock has crept higher. The leading independent prepaid card provider for the underbanked got a boost on Tuesday after TSYS (NYSE: TSS) agreed to buy NetSpend (NASDAQ: NTSP) for $1.4 billion.
Considering Green Dot is the leader in the sector though only worth $540 million, investors should consider whether that stock offers a better value. Based on the buyout news of a competitor at a large premium the stock should’ve gained more than 2.5% on the day.
TSYS is a leading global payment solutions provider, making the purchase of a provider of general purpose reloadable (GPR) prepaid debit cards a natural fit. The agreement calls for TSYS to acquire NetSpend in an all-cash transaction valued at approximately $1.4 billion. NetSpend shareholders will receive $16 in cash for each share of common stock.
The deal is expected to be accretive to GAAP EPS for the first 12 months after closing the deal, which is expected to occur in mid-2013.
The deal is roughly 30% above the previous closing price for NetSpend. Ironically the stock dropped over 3% in trading on Tuesday, suggesting the market wasn’t tipped off of a pending deal, though the stock had recently rallied to 52-week highs.
Oddly the deal only values the stock back around the initial gains in the weeks after the IPO. Any investors buying on the initial pop in late 2010 would see limited gains. On the flip side, investors buying in during the 2011 plunge had substantial gains with months to buy the stock below $6.
One of the biggest questions will be why the company paid up for NetSpend compared to Green Dot. The latter has a larger revenue base and some interesting mobile technology, but a substantially lower valuation.
NetSpend provides more than 62,000 merchant locations to distribute the prepaid debit cards and a customer base of more than 2.4 million accounts. With over 46% of the accounts using direct deposit, the company has a solid recurring base.
According to TSYS, the rational for the purchase is that this sector is expected to grow at a 20% annual rate over the next four years. Not to mention, the deal is expected to be accretive in the first year.
Why not Green Dot?
Very possibly Green Dot wasn’t for sale after a horrible 2012 that saw the stock plunge to all-time lows. The stock dropped all the way from $65 back in late 2010 to trading below $15 prior to this announced deal.
As mentioned in the previous article, the biggest issue with Green Dot was the reliance on the Wal-Mart deal that came into question as the massive retailer introduced new competition via the Bluebird card from American Express.
Clearly Green Dot lacks the momentum, but the company does offer a solid revenue base of around $550 million. It had nearly 4.37 million active cards at the end of 2012 or nearly double that of NetSpend. Earnings are also expected to exceed $1.10 for 2013 and the company has a rock solid balance sheet with nearly $200 million in unencumbered cash.
Any similar valuation offered to Green Dot would provide a triple to investors. Unfortunately this valuation difference likely made a deal impossible to reach. An acquirer such as TSYS wouldn’t be willing to pay up while the investors at Green Dot couldn’t accept a small premium if huge potential still exists.
With the small gain on Wednesday, investors clearly do not see a lot of opportunity in a leading prepaid debit card provider. The company is very profitable and has a fantastic balance sheet, but it clearly needs some help getting beyond the reduction of exclusivity at Wal-Mart.
If Green Dot can hit a homerun with the mobile bank, GoBank, this stock could be a huge winner especially if corporations remain willing to pay up for stocks in the sector.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!