Shares of Alliance Data (ADS) are under pressure after the company announced it had entered into a definitive agreement to sell its Epsilon business to Publicis Groupe (PUBGY) for $4.4B in cash. Following the news, BMO Capital downgraded Alliance Data to Market Perform, while Stephens cut its rating for the stock to Underweight. Not as bearish, Wells Fargo analyst Timothy Willi said he ultimately views this development as positive, given the accretive nature of the transaction and the streamlining of Alliance Data's business, which should be better received by investors.
EPSILON SALE: Over the weekend, Alliance Data announced it has entered into a definitive agreement to sell its Epsilon business to Publicis for $4.4B in cash, representing an approximate 10 times trailing 12-month EBITDA multiple. The transaction was unanimously approved by Alliance Data's board and is expected to close early in the third quarter, subject to satisfaction of customary closing conditions and receipt of regulatory approvals. Net cash proceeds, after tax obligations and fees associated with the transaction, are expected to be $3.5B. Alliance Data expects to use the full amount to repurchase shares and pay down corporate debt. On a full-year run-rate basis, the transaction will be accretive to core earnings guidance of $22 and "highly accretive" on a GAAP basis, the company said in a statement.
SALE PRICE LOWER THAN EXPECTED: In a research note to investors, BMO Capital analyst Daniel Salmon downgraded Alliance Data to Market Perform from Outperform and lowered his price target on the shares to $183 from $205. The analyst argued that the sale of Epsilon to Publicis for $4.4B was below his valuation of $5.4B for the business, and added that the downgrade reflects lower valuations of Alliance Data's Epsilon and Cards Services units in his sum-of-the-parts model. Voicing a similar opinion, Stephens analyst Vincent Caintic downgraded Alliance Data to Underweight from Equal Weight and lowered his price target on the stock to $165 from $188. The analyst believes that the $4.4B sale price for Epsilon and the $3.5B net proceeds to the company was "lower than market expectations." Furthermore, Caintic argued that even though it is "tough to be negative" on Alliance Data ahead of its anticipated big buyback, he sees no positive catalysts for the stock in 2019 at this time.
STRUCTURAL CHALLENGES REMAIN: Also commenting on the Epsilon sale, Wedbush analyst Moshe Katri said that while his estimated Alliance Data stand-alone pro forma model suggests such a transaction could be highly accretive for its EPS given Epsilon's lackluster growth rates combined with an inflated cost structure, results from Alliance Data's 100-plus retailers will likely continue to be cannibalized by the "Amazon" (AMZN) effect, capping transaction volume growth and impacting results of the company's largest segment. Furthermore, the company will be selling its "big data"/analytics business, which in the past has been viewed as a significant competitive differentiator, he contended. The analyst reiterated a Neutral rating and a $180 price target on Alliance Data shares.
EPSILON SALE POSITIVE: Reiterating an Outperform rating and a $200 price target on Alliance Data, Wells Fargo's Willi told investors that he ultimately views the Epsilon sale as a positive, given the accretive nature of the transaction and the streamlining of Alliance Data's business, which should be better received by investors. Willi added that he expects further detail on the company's first quarter earnings call, and believes management may look to further refine the business through a sale of LoyaltyOne following the Epsilon sale. Applauding the strategic efforts at Alliance Data, KeyBanc analyst Josh Beck said he views the $4.4B sale of the Epsilon marketing business to Publicis as an unlock of shareholder value provided the 10-times EBITDA multiple. However, the analyst acknowledged that the transition within the card business to re-orient toward verticals such as home, children, and beauty remains a work-in-progress. Beck expects in-line results and guidance ex-Epsilon, and remains Sector Weight as he looks for better visibility into the evolution of the card business and credit trends.
PRICE ACTION: In morning trading, shares of Alliance Data have dropped nearly 10% to $163.34.