Alliance Data Boosts Digital Marketing with Conversant Buy - Analyst Blog

Alliance Data Systems Corporation ( ADS ) inked a deal to acquire Conversant, Inc. ( CNVR ), a leading digital marketing company, for consideration of $2.3 billion. The deal is expected to close by the end of the year subject to closing conditions.

Upon closure, Conversant will merge with Epsilon, a leading provider of multichannel, data-driven technologies and marketing services, under the umbrella of Alliance Data.

Shares of Alliance Data gained 2.4% in the after market trading session, closing at $259 per share. With optimism surrounding the deal, the share price is expected to rise further in the next few trading sessions.

The Transaction in Detail

Alliance Data will acquire Conversant for $2.3 billion, which is equivalent to $35 per Conversant share, a 34% premium to the 30-day average closing price of Conversant's stock. This consideration comprises 48% in cash and 52% in shares, which values Conversant's shares at 10 times its 2015 adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $230 million.

The exchange ratio of 0.07037 will remain fixed at close. The cash consideration will vary but lie within the $14.98 - $18.62 per share ($284 -$233 price per share of Alliance Data stock) band.

Though an acquisition, this agreement has been structured as a merger, where Conversant stockholders will own 7% of the combined company and the remaining 93% will be owned by Alliance Data stockholders.

Financing the Deal

Alliance Data plans to finance the cash portion of the acquisition through a combination of existing cash on hand and availability under its credit facility. The company's solid cash and cash equivalents and credit facility are expected to adequately support the payout.

Rationale behind the Acquisition

Alliance Data has been consistently marking its presence in key digital channels, including targeted display, mobile and social. Conversant's enhanced focus on the higher growth digital marketing segment boosts the former's position in the digital marketing channels, particularly display. The acquisition also broadens Alliance Data's Omni-Channel distribution capabilities. Conversant capitalizing on secular growth hence leverage Alliance Data's digital marketing that is experiencing rapid secular growth

This acquisition will also help Alliance Data to provide end-to-end marketing services which will upgrade online, anonymous, unstructured data as well as cross-device and cross-channel technology through Conversant's Common ID. This will add important capabilities to Epsilon's digital messaging platform - Agility Harmony.

Additionally, Alliance Data expects the acquisition to be accretive to its core earnings per share by 50 cents in the first year and 75 cents in the second. The Zacks Consensus Estimate for 2015 is currently pegged at $13.73. We expect the number to move north as analysts start incorporating the accretion in their estimates.

Post acquisition, Conversant will be part of Epsilon enriching its offline and online data set, thereby resulting in more efficient and targeted marketing programs and providing a high value-add, differentiated product offering to customers. Alliance Data estimates the combined entity will generate more than $2 billion in revenues and in excess of $0.5 billion as adjusted EBITDA. Conversant has an impressive track record of delivering high single-digit organic revenue and adjusted EBITDA growth rates that is also expected to continue going forward. Epsilon combined with Conversant is estimated to contribute 35% to the consolidated revenues, going forward. The other two segments - Private Label and LoyaltyOne - are expected to contribute 40% and 25%, respectively, to the company's revenues.

The acquisition will lower competition for Alliance Data as both the companies compete for their share of the $400 billion annual marketing spend in North America. The market spending largely comprises traditional or general advertising and traditional direct marketing of $150 billion each and digital marketing of $100 billion.

Currently, Alliance Data holds a Zacks Rank #2 (Buy). Investors interested in the Financial Transaction Services sector could also consider stocks like Green Dot Corporation ( GDOT ) and WEX Inc. ( WEX ). While Green Dot sports a Zacks Rank #1 (Strong Buy), WEX holds the same rank as Alliance Data.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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