NetSpend Holdings Inc, which sells prepaid debit cards to low-income people, could face a rocky road as it seeks to raise just over $200 million in an IPO next week. The market for such cards, people who often do not have much access to credit, is booming: funds loaded on prepaid cards are expected to grow to $118.5 billion in 2012 from $36.6 billion in 2010, according to a study by the Mercator Advisory Group.
-- Prepaid card market seen growing to $118.5bn in 2012
-- NetSpend plans to raise about $200m in IPO
But its relationship with its chief distributor and a steep valuation could make it hard for NetSpend to capitalise on industry growth. ACE Cash Express Inc, which, as a "payday lender" offers short-term, high-interest loans to people who need money before they get their next pay check, sells NetSpend debit cards and reloading services at its stores. ACE accounted for 37 percent of NetSpend's revenue in 2009, but that relationship looks shaky.
ACE in June brought an arbitration suit against NetSpend over its consumer and online marketing and said it wanted to end its distribution agreement. They resolved the dispute and signed a new agreement in September. Morningstar IPO analyst Michael Gaiden agreed. "That further muddies the waters for any potential IPO investor," he said. "It should be cause for some caution."
ACE plans to sell 85 percent of its 67,168 Netspend shares in the IPO. In fact, most of the shares being sold in the offering are from existing shareholders. Directors and executives are selling a combined 9 million shares. IPOs in which most of the shares are sold by existing shareholders often make investors nervous because it suggests the sellers know something that new investors may not.
NetSpend is planning to sell shares for $10 to $12 each. At the midpoint of that range the Austin, Texas-based company would have an enterprise value-to-operating income multiple of 29 - roughly what competitor Green Dot Corp trades at now, Gaiden said.
Green Dot shares have risen more than 30 percent above their IPO price since their July flotation; IPOs typically price at a 10 percent to 15 percent discount to their publicly-traded peers. NetSpend declined to comment, citing US Securities and Exchange Commission "quiet period" rules that prevent the company from commenting publicly prior to its IPO.
In evaluating NetSpend and deciding whether to buy, investors may look to Green Dot's relationship with Wal-Mart Stores Inc, which is its chief distributor. Visa Inc and MasterCard Inc, the world's largest credit card networks, are expanding the market by helping NetSpend and its competitors develop prepaid debit cards.
Both companies are looking to prepaid debit as a way to grow in a saturated US credit card market and increasing regulation of traditional credit and debit cards. But for now, at least, NetSpend and Green Dot have the field largely to themselves. Mainstream US lenders are still reluctant to compete in the prepaid card market, in part because those most likely to use prepaid debit cards are less wealthy and are not seen as profitable bank customers.
Prepaid debit cards are "an opportunity. But I think you're going to see very small transactions, so it's not going to be a game changer," said Diane Offereins, the head of Discover Financial Services's payments services unit. Discover offers some prepaid debit products and its network business processes some prepaid debit transactions for Green Dot and NetSpend.
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