By now you have probably already heard about the recent sale of NPC Check Services, Inc., to International Payment Services Inc., a company newly formed by Stephen D. Kane and GTCR Fund VI, L.P. for "approximately $38 Million." The sale is expected to close during the second quarter of 1999.
Just about seven years ago, National Processing Company, a company 88% owned by National City Corporation, began a check acquisition strategy, acquiring JBS Associates, which was then one of the best-run check guarantee companies in the industry, as well as a Texas-based check company called Check Security Service. The purchase of JBS and CSS began a seven-year business cycle, which ended April 14, 1999, with NPC reportedly suffering a self-inflicted $74 million expense in order to reflect the actual and estimated cost to sell, liquidate, and dispose of several business lines, most notably their check guarantee business.
Many companies were immediately interested in vying for NPCís check business, and a small bidding war ensued. TeleCheck, which was reported at one time to be a front-runner in the bidding, didnít make the final cut. While it will take some time to see what this new ownership will mean for merchants, and for the competition in the industry, the sale already tells us a couple of things about the past.
National Processing Company (NPC) purchased JBS in November 1992 for a total price of $60 million in cash and stock. JBS reported FAA (face amount approved) of $5.1 billion in 1991 and $5.6 billion in 1992, a 9.8% increase. JBS reported $6.0 billion in FAA at the time of purchase. Revenues at the time of sale were reported to be $50 million or a weighted rate of .83%. The acquisition of JBS followed the June 1992 NPC acquisition of Check Security Service of Houston, Texas, the third largest check verification/contingency collection firm in the nation. This purchase price translated into 1.00% of FAA or 1.20 times gross revenue, and was considered to be a low price at the time in comparison to earlier sales.
As a comparison, Telecredit was purchased in November 1990 by Equifax, Inc,, for a total price of $457 million. Telecredit reported FAA of $6.9 billion in 1989, and $7.9 billion, in 1990, a 14.5% increase. The acquisition took place in late 1990 and was based on the revenue in the fiscal year ending April 1990. Telecredit revenues in April 1990 were $98.2 million. This translates into a purchase price of 1.24% of FAA or 4.65 times gross revenue. On the other hand, in July 1992 TeleCheck was purchased by First Financial Management Corporation (FFMC) for a total price of $159 million ($116 million cash, $14 million in FFMC stock, and $29 million in debt). TeleCheck reported FAA of $9.2 billion in 1991, $8.4 billion domestic and $820 million outside the U.S. (8.6%). TeleCheck reported FAA in 1992 of $10.7 billion, a 16.3% increase over 1991. The acquisition took place in the middle of this time frame, July 1992, and was based on the TSI and PSC revenue in the year ending December 1991, and October 1991, respectively. TSI revenues at December 1991 were $58.5 million and PSC revenues were estimated to be $65.0 million at its year-end in October 1992.
Transitional data suggests that the mid-1992 FAA was $9.5 billion, with combined TSI/PSC revenue of $120 million or a weighted rate of 1.26%. This translates into a purchase price of 1.67% of FAA or 1.33 times gross revenue.
It probably goes without saying that it is not a good business idea to buy high and sell low, particularly when it represents only 36% of the former value. However, in this case, the JBS and CSS businesses had been on a growth path before their acquisition and appeared to continue on that same path over the next six years.
So what went wrong? Based on the businesses purchased and the time that NPC has had to leverage their position in the bankcard industry, their investment should have turned into at least a $100 million to $120 million business. Given these numbers, one must conclude that either NPCís sale of this business segment was a fire sale, or IPS negotiated one hell of a deal. Based on the information that NPC reported to The Nilson Report at the time of purchase and again last year, the value per dollar of checks guaranteed or per customer really took a beating.
1. 1997 volume of check guarantee was reported to be $9.5 million, 15% greater than 1996. For the estimate of the 1998 volume we added 10%. 1997 merchant locations were reported by NPC in 1998 to have been 62,000 locations, a growth of 8% over 1996. For our 1998 figures, we have added 5% to reflect the estimated location numbers.
