Consolidation in the prepaid industry
has long been predicted by industry experts, as new start-ups
succumb to the promise of more profitable larger transaction
volumes which can be achieved by joining forces with more
established players.

However, it has not been an easy process
for some. In 2007, Capital One announced with much fanfare it would
acquire US prepaid pioneer NetSpend in a $700 million deal, but
that fell through following huge credit losses at Capital One,
coinciding with the emergence of the credit crunch.

Now, global payment processor First Data’s
planned $1 billion acquisition of another US prepaid player,
InComm, has been scrapped, with the companies mutually agreeing to
terminate the deal, which was first announced in April 2008.

The acquisition plan was forged with the
intent of enabling First Data to extend its reach into the retail
sector, by distributing its clients’ prepaid cards via InComm’s
extensive distribution network – InComm provides prepaid cards and
services through more than 145,000 retail locations, including
big-name retailers like Blockbusters and Starbucks, and in 2007 the
firm processed almost $8 billion in retail sales transactions.

Attractive distribution

In an interview with sister
publication Prepaid Cards International following the
initial acquisition announcement, First Data stated that InComm’s
distribution capabilities was one of the main drivers of the deal,
including bringing InComm’s expertise in merchandising and
marketing to a global market while providing First Data with an
all-important expansive retail footprint.

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Instead, First Data has signed a distribution
agreement with InComm, with both companies saying they will
continue to support their joint customers with prepaid card
processing, programme management and a distribution network
allowing First Data and its merchants to sell prepaid products in
InComm prepaid card malls.

According to Aite Group analyst Gwenn Bezard,
the collapse of the deal can be partly attributed to the ongoing
fall-out of the credit crunch, which has halted many potential
mergers and acquisitions as firms look to conserve capital. Bezard
also noted that since First Data itself was acquired by private
equity giant Kohlberg, Kravis & Roberts in 2007, it has been
looking to rein in costs and spending.

Outlook for future acquisitions

In its third quarter results,
announced on 14 November, First Data reported that while
consolidated revenues were up 4 percent to $2.2 billion, loss from
continuing operations was $164 million, but included $270 million
of incremental interest expense net of tax, and $124 million of
incremental depreciation and amortisation net of tax compared to
the third quarter of 2007.

Both the incremental interest
expense and depreciation and amortisation are primarily
attributable to the KKR transaction.

Bezard said: “It is likely that First Data has
opted to preserve its cash and lines of credit. Deciding not to
acquire InComm is probably a wise decision in that regard. I do not
expect this termination will affect First Data customers since the
acquisition was very much an extension of their existing

The outlook for further mergers and
acquisitions in the prepaid sector is gloomy. Although industry
experts state that the retail prepaid card sector is one of the
most promising, there are unlikely to be any further big-name
announcements in this field while the economic turbulence that has
engulfed global markets continues.

Ironically, it may be that smaller prepaid
players with their own pool of capital may find it easier to
identify acquisition opportunities than larger players like First
Data which are dependant on leveraged debt and the business
strategies of their private equity owners.

Since KKR took over ownership of First Data,
the payment processor has divested several entities, including
Active, Early Warning Services and Peace, along with terminating
its Chase Paymentech merchant business with JPMorgan Chase.

In early November, KKR cofounder George
Roberts said that KKR would suffer its first annual loss on its
portfolio since 1990-1991, and KKR’s own initial public offering
has been delayed until at least next year.

Roberts also added that he saw little lending
available for buyout deals in 2009, and that the outlook was
unlikely to improve any time soon.