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Here's Why Shares of Alliance Data Systems Plunged on Monday

A merchant uses a credit card reader.

What happened

Shares of Alliance Data Systems (NYSE: ADS) fell 9.34% on Monday, following the company's sale of its Epsilon data marketing operation to Publicis Groupe (NASDAQOTH: PUBGY) for less than what some on Wall Street had hoped the unit would fetch.

So what

Alliance Data, which reported a disappointing fourth quarter in part because of weakness at Epsilon , on Sunday announced an agreement to sell the unit to Publicis for a net purchase price of $3.95 billion, or about 8.2 times 2018 adjusted EBITDA for the unit. The deal for Epsilon includes an arrangement for Publicis to build a strategic partnership with Alliance Data's remaining businesses.

Epsilon offers email marketing services and manages data from loyalty programs and other campaigns.

A merchant uses a credit card reader.

Image source: Getty Images.

Alliance Data CEO Edward Heffernan in a statement said that "with this transaction, we have found what we believe to be the right home for Epsilon's technology, data assets, and associates."

But some on Wall Street had hoped for a richer price. BMO Capital analyst Daniel Salmon downgraded Alliance Data to "market perform" from "outperform" and lowered his price target to $183 from $205, saying the sale was well below his $5.4 billion valuation of Epsilon. Similarly, Stephens analyst Vincent Caintic downgraded Alliance Data to "underweight" and lowered his price target to $165, calling the deal price "lower than market expectations."

Now what

The Epsilon business was hardly an outperformer, with tepid growth and an outsize cost structure. But the data and analytics business despite its issues was seen as attractive because of the desire among retailers to counter Amazon . com 's high-tech wherewithal.

ADS intends to use the estimated $3.5 billion in net proceeds from the sale for share repurchases and debt reduction, which should help boost performance in the near term. But the bigger worry for investors is what the catalyst for growth will be now that Epsilon is gone.

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