Buyout of Network and Financial Data Provider

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On December 11, 2012, New York-based Siris Capital Group tendered a formal buyout offer to the shareholders and management team of Reston, Virginia-based TNS (NYSE: TNS). Once the deal has been finalized and closed, all current TNS shareholders will receive $21 in cash per share. The company will become a wholly-owned subsidiary of privately-held Siris. Barring any unforeseen complications, the deal should close by the end of the first quarter of 2013.

The proposed deal represents one of the largest takeovers ever orchestrated by Siris Capital. Valuing TNS at about $862 million, it provides the company's shareholders with an immediate premium of 44 percent relative to the stock's December 10 closing price of $14.56. However, the deal still provides excellent value for Siris's stakeholders. TNS's stock traded above $22 per share as recently as April of 2012 and reached a five-year high above $30 per share in October of 2009. Since the S&P hit a multi-year bottom in March of 2009, TNS shares have traded in a wide range between about $6.50 and $31.

A string of mediocre earnings reports may be one factor behind TNS's sudden attractiveness to private equity. After taking a beating during the acute period of the 2008 financial crisis due to its exposure to the credit-dependent world of electronic payments, the company's stock staged a roaring comeback during the latter half of 2009. However, it struggled to keep up with its aggressive valuation and optimistic analyst-set price targets. Its early-October closing price of $13.89 represented its lowest level since early 2009.

The TNS Business
Despite its recent struggles, TNS remains an important provider of electronic data solutions and payment-processing support. The company operates switchboard-like services for complex land line phone systems as well as business-to-business Internet routing. It helps facilitate data transmission along dial-up and broadband lines. The company also operates a separate payment systems division that facilitates the transmission of electronic payments along heavily-encrypted pathways. TNS employs about 1,300 people and enjoyed income of about $14.7 million on gross revenues of $553 million in 2011.

TNS typically provides these services for online merchants, call centers and other geographically-dispersed operations that routinely process payments. Although it operates on a global basis, the bulk of its clients do business in North America and Europe. TNS has partnered with American Express (NYSE: AXP) to build the American Express Payment Gateway available in many countries worldwide.  The gateway allows businesses to easily provide online payment options.  The American Express Payment Gateway is now in the US, UK, Australia, Mexico, and now France.  This growing venture should at revenue to the income statements of TNS and American Express for years to come.

In recent years, it has become a major player in the "alternative-trading" space and currently operates nearly 2,000 distinct trading and transaction-processing terminals used by hundreds of individual clients.

TNS sells a service to exchanges as well.  Nasdaq OMX (NASDAQ: NDAQ) has been on TNS’s Secure Trading Extranet for years.  The Nasdaq Exchange has about 3500 listed companies trading on its platform, along with many indices.  TNS’s Extranet helps exchanges like the Nasdaq remain competitive on a global scale and provide high frequency trading with low latency.

The Next Step
This deal is made considerably more likely by the fact that Siris will not have to secure any outside financing facilities to complete its purchase of TNS. Of course, the transaction will be subject to the customary board of directors and shareholder votes as well as close antitrust scrutiny. Given the attractive premium that Siris appears willing to pay for the property, it is unlikely that shareholders will vote down the proposal. Likewise, Siris's lack of any other footholds in the payment-processing industry makes it unlikely that any antitrust issues will arise.

The deal technically remains on hold pending the expiration of a 30-day solicitation period. As of yet, no new bidders have stepped forward to make a more attractive offer for the company. However, a New York-based law firm has launched a customary investigation into the circumstances surrounding TNS's agreement with Siris.

The firm alleges that TNS's management team violated its fiduciary responsibility to the company's shareholders by failing to value the company at appropriate levels and solicit additional bids. The investigation documents note that stock analysts had set 12-month price targets of more than $27 per share during the 12-month period that preceded the announcement of the buyout. However, TNS's lack of share price momentum during the same period indicates that the firm may be suffering through a period of cyclical weakness and deserves its current valuation.

At the moment, the investigation continues. If it determines that there is substantial evidence to support these accusations, the firm may well form a shareholder class and take legal action against TNS's management team. Should this occur, the deal is likely to be delayed until the matter is dismissed or resolved. In the meantime, other bidders might step in and float higher buyout offers. As such, TNS shareholders would be advised to add to their positions should the stock's value slide during any future periods of uncertainty.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends American Express. 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!

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