Green Dot Corporation (GDOT) penned a definitive agreement to acquire Santa Barbara Tax Products Group (“TPG”) for nearly $320 million. The move will enable the prepaid card pioneer to diversify its offerings by adding tax refund processing services to its portfolio, via partnerships with tax preparers.
The move is designed to reduce the company’s dependence on retail giant Wal-Mart Stores Inc. (WMT). In 2013, Green Dot generated around 64% of its revenues from prepaid cards and other financial services distributed through Wal-Mart. Three other large retail chains contributed another 22% to its sales. The TPG acquisition will expand Green Dot’s offerings beyond personal banking and broaden its product portfolio.
Transaction Details
The cash-and-stock deal is valued at approximately $320 million. Green Dot expects to fund the transaction with $55 million in cash, $150 million in new bank debt, and the residual with around 6.133 million shares of its common stock. Consequently, TPG investors will own around 10.5% stake in the combined entity.
The terms of the deal also include a potential $80 million cash earn-out payable to TPG investors, contingent on TPG meeting certain pre-determined performance targets over the next three years. The acquisition is expected to conclude within two months, subject to customary closing conditions.
Revisions to 2014 Guidance
Green Dot also updated its 2014 guidance to reflect the expected impact of the pending acquisition on its financial results.
The acquisition will likely increase operating expenses by about $6 million in the current year, reducing the outlook of adjusted EBITDA to a range of $122–$126 million. The deal is not expected to materially impact the company’s operating revenues.
Adjusted earnings are expected to be negatively impacted by about 12 cents per share, after incorporating the higher operating costs and stock dilution due to the acquisition, Green Dot now anticipates earnings of $1.25–$1.29 per share, down from its July forecast of $1.37–$1.41 per share. The Zacks Consensus Estimate for 2014 earnings currently stands at $1.20 per share.
As a rough estimate, the TPG acquisition is expected to generate mid-teens percentage accretion to adjusted earnings per share in 2015, excluding synergies.
Synergies
The deal is expected to boost Green Dot’s margins as it generates higher and more diversified earnings. Also, TPG’s robust cash flow model will significantly enhance its cash flow generation capacity.
TPG is incorporated as the tax refund processing and settlement engine for four out of the six foremost consumer tax preparation companies. Also, the nation’s top tax software companies use TPG’s services, enabling it to serve almost 25,000 independent tax preparers and accountants nationwide.
Furthermore, TPG’s client segment is highly correlated to Green Dot’s customer base comprised of LMI (Low and Moderate Income) American families. Accordingly, the deal has great potential to enhance revenues significantly by bundling Green Dot’s prepaid cards and checking account services with TPG’s consumer tax refund processing services.
Looking Ahead
With a market capitalization of about $786 million, Green Dot is the largest provider of prepaid debit card products and prepaid reloading services in the U.S. It competes with Blackhawk Network Holdings, Inc. (HAWK) and American Express Company (AXP) which offer the Bluebird card service.
This Zacks Rank #1 (Strong Buy) stock has plunged 19.2% year-to-date. The acquisition will expand Green Dot’s offerings to its core customer segment, boosting its revenue stream and enhancing margins. The deal promises great potential to enhance Green Dot’s financials and boost share price performance in the upcoming quarters.
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