Thursday, December 22, 2005

TSYS loses major client

TSYS (TSS) formerly, Total System Services, was one of the worst performers on the NYSE yesterday as a result of the loss of its contract with Bank America.

Bank America (BAC) announced that it is terminating their contract with TSS and intends to have de-converted all of its accounts by October of 2006. The lost revenue for TSS amounts to $140M or about 10%-11% of TSS revenues. BAC will have to pay a termination fee that at this time is unspecified.

Since BAC was on contract until 2014 and has 8 years left on the contract, I believe it could be a sizable breakup fee. Most of these contracts have breakup fees that require the minimum guaranteed payment for the remainder of the contract.

Most analysts this morning are nattering about the vulnerability of TSSS to bank consolidation. What seems to be forgotten however is that for all the bank consolidation that takes place, there appears to be a great rise in de-novo banks. I recall looking at some statistics for Florida banking, one of the hotbeds of consolidation, where one year 143 Florida banks merged or were bought out. That same year, 126 de-novo banks started up!

I agree that the loss of BAC does represent some short term pain, and a loss of face. But let’s look at what’s left:

  1. Some kind of a breakup fee for contract termination.

  2. Excess capacity that will begin to fill up as the Capital One contract picks up in late 2006.

  3. Marketing internationally…just signed a deal in China, and exploring opportunities in Central Europe.

  4. Greater chance for separation from Synovus (SNV) parent

The relationship with SNV in some ways is a lose-lose situation from the standpoint of both companies’potential. SNV is less attractive as a bank merger candidate because the purchasing bank has to buy the 81% of TSS held by SNV. TSS, as this event demonstrates, is to some degree tainted by its parent.

Optics aside, this has been a terrific business. No debt, returns on invested capital in the high teens to 20%. There has been $473 million in free cash flow over the last five years. Yesterday’s $3.05 drop in price equated to a drop in market capitalization of $600 million!

Revenues have grown in the last five years at a CAGR of 17% and this has accelerated in the most recent TTM to 28%. The five year growth rate in dividends has been 28% as well.

On an EV/EBITDA basis, the business is trading at less than a ten multiple.

Clearly, more of a GARP value than a traditional value, but one that I find quite intriguing.


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