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NetSpend Holdings (NASDAQ:NTSP)

February 19, 2013 6:00 pm ET

Executives

Shawn Roberts - Director of Investor Relations

Philip W. Tomlinson - Chairman, Chief Executive Officer and Member of Executive Committee

M. Troy Woods - President, Chief Operating Officer, Executive Director and Member of Executive Committee

Daniel R. Henry - Chief Executive Officer and Director

James B. Lipham - Chief Financial Officer and Senior Executive Vice President

George W. Gresham - Chief Financial Officer and Principal Accounting Officer

Analysts

David Togut - Evercore Partners Inc., Research Division

Dan McCarthy - Integre Advisors, LLC

Ashwin Shirvaikar - Citigroup Inc, Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Darrin D. Peller - Barclays Capital, Research Division

Kevin D. McVeigh - Macquarie Research

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Lawrence Berlin - First Analysis Securities Corporation, Research Division

Operator

Good afternoon. At this time, I would like to welcome everyone to the TSYS conference call. [Operator Instructions] I will now turn the call over to your host, Mr. Shawn Roberts, Senior Director of Investor Relations. Sir, you may begin.

Shawn Roberts

Thank you, LaTasha, and good evening, everyone. Before we begin, let me please remind you that the presentation contains some forward-looking statements based on current expectations or beliefs, as well as a number of assumptions about future events and these statements are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The audience is cautioned not to put undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to a number of uncertainties and other factors, many of which are outside the control of TSYS and NetSpend. The forward-looking statements in the presentation address a variety of subjects including, for example, the expected date of closing of the acquisition and the potential benefits of the merger. Factors among others that could cause actual results to differ materially from those described in the forward-looking statements are set forth on Page 2 of the slide presentation for today's call and in our filings with the SEC.

At this time, I'd like to turn it over to Phil Tomlinson, TSYS' CEO.

Philip W. Tomlinson

Thank you, Shawn, and good evening, everybody. Needless to say, we're delighted to be with you tonight and share with you the details of this exciting announcement that is -- we believe is truly a transformational event for TSYS.

We are sitting here in the great city of Austin, Texas today, just a few blocks away from the state capitol, and we've just finished an all-hands meeting with the NetSpend employees that are located here, as well as the ones that are located in other cities around the country, where we shared how proud we are and told them what a great job they've done with this company and the key role they play in helping us leverage the combined strengths of our 2 companies.

Needless to say, this is the largest transaction today for TSYS. We have studied this business, and we believe we understand it. It's also the fastest-growing segment of payments, which we are very excited about. It gives us great diversity in the payments business, which we, as you know, have been looking for.

So I want to get down to business here. We've provided a presentation for you to follow that's available on both the TSYS and NetSpend Investor Relations website. And joining me in the room today are Troy Woods, President of TSYS and Chief Operating Officer; and Dan Henry of NetSpend; also Jim Lipham, the TSYS CFO; and George Gresham, NetSpend's CFO; and Chuck Harris, who's President of NetSpend. Following this presentation, we'll open it up for a Q&A session.

And with that, I'm going to turn it over to Troy Woods. Troy?

M. Troy Woods

Thank you, Phil, and good evening. As Phil indicated, we're all very excited about today's announcement to acquire NetSpend and create one of the industry's most unique payment companies. I would also like to welcome the many TSYS and NetSpend team members, clients and shareholders joining us this evening for this momentous occasion.

If you are following along on the TSYS or NetSpend Investor Relations websites, I will begin on Page 4 with the transaction overview.

From a structure perspective, TSYS intends to acquire all of the outstanding shares of NetSpend at $16 per share. This price represents a 26% premium over Friday's close and will result in an enterprise value of NetSpend of approximately $1.4 billion. We expect to finance the transaction with a combination of cash on hand and approximately $1.3 billion in debt.

From an accretion dilution view, we expect the transaction to be GAAP EPS accretive for the first 12-month period following closing, excluding any one-time acquisition-related fees and expenses.

One of the personal highlights of this transaction for me is the fact that Dan Henry and Chuck Harris will continue in their respective roles as CEO and President of NetSpend to run and manage the company. NetSpend's outstanding leadership team has more than 50 years of experience in payments. And we're very delighted key members of this team will continue to be with us.

As to our go-to-market positioning, we will keep the great brand name of NetSpend and, upon closing, add a TSYS company to their name. Also post-closing, NetSpend will become our fourth operating segment, further diversifying our revenue mix.

Speaking of closing, we are expecting the transaction to close, as Phil indicated, in mid-2013, subject to customary closing conditions, including approval by NetSpend shareholders and required regulatory approvals.

Now if I could, I would like to call your attention to Slide 5. We believe there are 5 major strategic reasons why the acquisition of NetSpend makes sense for TSYS. I will touch on each of these 5 points briefly and then provide additional color and detail on the following slides.

First, we view the prepaid market as very large and attractive. The annual revenue opportunity for the prepaid industry is $4 billion and is projected to double over the next 4 to 5 years. The revenue opportunity is not only large, but the prepaid categories are expanding as well to include corporate and consumer incentives, corporate and government disbursements and employee benefits. We also see an opportunity for the prepaid program management space to be an innovative cornerstone for emerging applications like mobile wallets and mobile payment apps.

Our second and third strategic rationales go somewhat hand-in-hand, and they are differentiation and expansion. This acquisition further differentiates our suite of product offerings to the TSYS clients we serve today, which are primarily financial institutions, retail and small business customers. This should provide us with opportunities to create new partnerships with our current customer constituency. It will also allow us to expand our customer base beyond financial institutions and merchants directly to the end consumer and open up new vertical segments as well.

This acquisition also provides us with an opportunity to acquire the absolute industry leader. We believe the NetSpend is the leader in the GPR industry with the best differentiated product, broadest and most diversified distribution channels with solid and growing financial metrics. We also believe that their culture and mission make them a great fit with TSYS and our people-centered payments branding.

And lastly, the addition of NetSpend will further diversify TSYS' offerings and revenue-generating potential into a fast-growing yet highly complementary market segment. The near-term accretiveness of the transaction should also accelerate TSYS' long-term growth rate.

Now for some additional color, beginning on Page 6. As we mentioned earlier, we view the acquisition of NetSpend as a transformative deal for TSYS. As Phil indicated, we have been a prepaid processor for over 10 years and know this side of the industry very well. By acquiring NetSpend, TSYS expands beyond prepaid processing and into one of the fastest-growing areas of payments and program management and, by our estimations, increasing the market opportunity for us by a factor of 8 to 10x. In gross dollar volume terms or purchase volume, the prepaid market today exceeds $200 billion and is projected to grow at a 20% compounded annual growth rate over the next 4 years. So again, we believe the acquisition exponentially expands our addressable market and provides us access to a large and high-growth opportunity.

Slide 7. As soon as practical after this transaction closes, we intend to capitalize on the opportunities we see as revenue synergies that make this transaction so compelling from a growth perspective. Today, TSYS services 8 of the top 10 U.S. financial institutions and more than half of the top 20 international banks. All in, TSYS processes for over 300 unique customers. These financial institutions and customers are looking for innovative products like general purpose reloadable cards, paycard capabilities and processing and program management expertise. TSYS processes for nearly 85% of all the purchasing, corporate and fleet Visa and MasterCard spend volume in North America. We also provide credit card services to approximately 2.5 million small businesses and more than 700,000 midsized companies, large corporations and government agencies.

With the addition of NetSpend, we will be able to exploit all of these opportunities and offer these customers an end-to-end prepaid program ranging from program design to marketing and customer acquisition support, which extends us far beyond the prepaid processing role we've played to date. Together, we believe our market position will be formidable.

Equally important is our combined ability to expand solutions to the retail and small business sectors that we support with a broader array of innovative products. For example, TSYS has issuer relationships with some of the world's most recognized retail brands, and we have direct relationships with more than 400,000 merchants. These entities are attracted to GPR cards as an additional SKU level item that their shoppers want to purchase. In addition, some of these businesses could become reload outlets with the prospect of increasing foot traffic in their stores. Many of these businesses are also burdened with the costly expense of issuing paychecks. We could offer paycards that greatly reduce this cost and are far more attractive to the employee because they can be used immediately and in locations where they frequently shop.

And just as important, for those retail outlets interested in creating in-store financial service centers, we can facilitate this broader offering to better meet the needs of that customer base as well. For example, here in Texas, NetSpend has helped HEB Grocery establish financial service centers to better meet their customers' needs.

And lastly, NetSpend's expertise and history of innovation in the consumer-facing product development lead to new product opportunities for all of us. We believe their focus on the end consumer will help drive great innovation in the solutions we offer our current clients and their end customers.

As all of you know, today, 100% of NetSpend's business is in the United States. By leveraging TSYS' global brand and reputation in over 80 countries at the right time, we will help NetSpend expand globally. By leveraging the combined big data of TSYS and the analytics of NetSpend, we believe there are also opportunities in the loyalty and rewards space and person-to-person payments that could connect a TSYS credit and debit account to a NetSpend prepaid account. In summary, we believe the opportunities are endless.

Page 8. As Phil and I both have said on several occasions, we believe NetSpend is a leader in the prepaid industry. Their growth and scale are impressive. They are #2 in market share in GPR and paycard programs. They have grown revenues at a 22% compounded annual growth rate over the past 5 years. And they have grown the number of direct deposit active cards at a 51% CAGR over that same period of time. They have a superior and highly diversified distribution network supported by 4 distinct channels. These channels include partnerships with companies like Ace Cash Express and Intuit; direct to consumer through companies like BET and PayPal; paycard for employers and banks' corporate treasury customers; and of course, retail brands. They also enjoy the most robust reload network in the industry with over 130,000 locations to reload your NetSpend GPR card. NetSpend is also well recognized for their robust and innovative product capabilities customizable for the partners and channels they serve, and Dan Henry will expand on this in a few minutes.

NetSpend's philosophy is simple: they want to maintain long-term relationships with their customers and they have products, customer analytics and marketing design to keep customers for life. They clearly understand the behavior and economics of the underserved market. And lastly, but most importantly of all, they are a well-managed company led by a knowledgeable and experienced payments team.

Page 9. As you might expect, we view the diversification opportunities and financial metrics of NetSpend as compelling. With respect to diversification, the acquisition of NetSpend will have a significant impact on TSYS' revenue mix. As you can see in the pie chart in the top of Page 9, post-close, we expect NetSpend to contribute approximately 18% of TSYS' revenue. This will provide us with additional diversification and balance within our operating segments. As I said earlier, we expect the transaction to be GAAP EPS accretive for the first 12-month period following closing. Also, on a pro forma basis, NetSpend would have added approximately 200 basis points to TSYS' projected 6% to 8% revenue growth and approximately 300 basis points to TSYS' 7% to 9% expected EBITDA growth in 2013.

On a 2012 combined pro forma basis, TSYS' EBITDA would have been $613 million, representing an increase of 16%. We're convinced that the combined entities will generate significant cash flows for future reinvestment opportunities, as well as debt reduction.

Before we open it up for questions, I would like to ask Dan Henry, the CEO of NetSpend, to provide you with a more detailed overview of his business. Dan?

Daniel R. Henry

Thank you, Troy, and thank you, Phil. Before I begin the overview, I want to say how excited I am about NetSpend becoming part of such a reputable, successful company as TSYS. I also am very pleased to be staying on as leader of NetSpend along with Chuck Harris and other members of the senior management team.

Coming together with TSYS is great for NetSpend employees too. We become part of a larger TSYS family, and this provides expanded opportunities for NetSpend employees. The combined resources of both companies give NetSpend the ability to expand its new markets faster, leverage relationships with TSYS' current bank clients and increase our product innovation capabilities. In short, we become an even stronger competitor in the prepaid industry. I believe NetSpend's successful track record of growth over the past few years will only accelerate with the backing and resources of TSYS.

But for those of you who may not be familiar with NetSpend's business, product offering and how we differentiate ourselves in the market, let me give you an overview. If you go to Slide 10, we'll start with that. NetSpend is a leader in the prepaid industry. We offer an FDIC-insured, bank-issued GPR accounts both general purpose reloadable cards and paycards. Our value proposition is pretty simple. For cardholders we offer them the freedom to be self-banked at a significantly lower cost than cash and many types of usual bank accounts. For our partners, we offer our partners an ongoing revenue share and reload income for serving our cardholders.

Our target market is the estimated 68 million unbanked or underbanked consumers in the U.S. In our end of 2012 key metrics, 2.4 million active debit cards; almost 1.1 million of those on direct deposit; 500 plus retail distributors; 62,000 distributing merchant locations; 130,000 reload locations, 1,400 employer relationships and more than $13 billion of GDV.

Slide 11, our strategy and differentiators. We are focused on our mission and our mission is to empower consumers with the convenience, security and freedom to be self-banked. When Troy and I first started discussions a while ago, I said to Troy that the most important thing to me is that NetSpend is going to be able to continue to fulfill its mission: to serve this consumer who has been mainly overlooked or taken advantage of for decades, this consumer who is trapped in the expensive cash-based economy. We believe this market is very large. We personally, to a person in NetSpend, are very passionate about serving this consumer. It's why we create such innovative products, we leverage our technology and we have a distribution network to reach this consumer that is very, very effective.

If you flip to Slide 12. Here are some of the highlights of our product capabilities. And remember, we reach the consumer that is typically unbanked, underbanked, low to moderate income consumer, many times trapped in the cash-based economy. This card, as I mentioned, is FDIC-insured. We have over 130,000 locations where the consumer can add funds to their card. We see more than 40% of our transactions happen outside of typical banking hours at these reload locations.

Some of the key features we offer for 8-plus years now, we've offered free wireless alerts. What that means is anytime there's any activity on your account, you'll get a text message to your phone or an email to your PC, which gives you details of your balance to the penny, along with details of the transaction that just occurred, time and place and amount.

And again if you think about this consumer, we're migrating them from cash to electronic payments. This information of knowing how much money they have at any given time in their account is very, very important to them. We also offer this consumer free person-to-person transfers from one cardholder to another. Again, place yourself in the shoes of an unbanked consumer. They don't have a checking account. How do you send funds to a friend or family member? With NetSpend, you can send funds instantaneously with a simple text message for free up to $1,000 at a time. Our consumer doesn't have much money to set aside. But if they do, we offer a savings program that pays 5% interest on your savings. We offer our customers who are on direct deposit the ability to overdraft their account up to $10 duty free without any penalty whatsoever.

These are just a few of our unique products that we have on our card. Again, uniquely designed to serve this low-income consumer and reach them where they are.

Next if you go to Slide 13. I believe this is also one of our very strong unique strengths, and we really are gaining traction, if you understand our business, in terms of reaching more and more consumers and accelerating the number of customers who've picked up our card and committed to it through direct deposit. We have 4 distinct channels, each one led by very capable, very strong entrepreneurs in their own rights.

I'll start first with our retail channel. 2012 on revenue contribution, quarter-to-date 2012, out of retail was a mere 8%. We had a tremendous year in 2012 of expanding our retail footprint. We started the year with only 8,000 retail locations, and we ended the year with more than 50,000 retail locations distributing our card. So as we step into 2013, we look forward to a strong growth in this retail channel. We have great partnerships with Blackhawk and InComm, and they help facilitate our distribution through many retailers like Dollar General, Walgreens, 7-Eleven. HEB has been a partner of ours for years. And we also are the exclusive distribution partner and program manager for PayPal.

Our next channel is our partner channel. This is the really historic business of NetSpend that we started, oh, 10-plus years ago. And if you think about, if you're a consumer who doesn't have a bank account but gets a paycheck or a government benefits check, where do you go with that? You go to a check-casher. We have over 450 check-cashing partnerships and we've had them for many, many years and they are a tremendous distribution channel partner for us.

We also just recently announced our partnership with Intuit and their flagship TurboTax program. So now this tax season, which is in full swing, consumers who do their taxes on TurboTax are able to choose to have their tax refund sent to them electronically by having those funds received on a NetSpend card.

Our third channel is our direct channel. This channel was pretty much nonexistent 5 years ago. Our team out in San Mateo, California together with some folks here in Austin, Texas, had built that business up to where it's 25% of our revenue. It is our fastest growing segment, and through some tremendous partnerships with BET and PayPal, but also through direct mail and online direct marketing have really created a tremendous channel for us.

And then finally, paycard. Paycard was brought on in July of 2008, have grown very, very well to 18% of our revenue. And this is where I think -- I think in all of our channels we've got great areas to leverage our relationships with TSYS. But I think paycard is the most notable, where we have 1,400 employers who issue our cards to their employees who do not have a bank account and so they're able to get paid electronically as opposed to taking a paper check.

We also partner with a number of banks to reach those small to mid-sized businesses: Regions, M&T, United Missouri Bank, SunTrust, RBS, Citizens. So if you think of TSYS and all the wonderful bank relationships that they have that we might be able to leverage, but then also all of the businesses that TSYS supports with their credit card product that we'll be able to reach. So all in all, our business is growing very nicely. We believe that the merger with TSYS will only accelerate our growth.

If you go to the next slide. Speaking of growth, you can see and this is a slide that I think I'm going to take away and have framed, this transaction, that shows very strong revenue growth from 2007 through 2012. We ended 2012 with $350 million in revenue. On our recent analyst call, we gave guidance for revenue growth, 2013. The midpoint of that guidance had revenue grow at about 19%. That's about $420 million, some change. And then on the adjusted EBITDA number, again, good strong growth. 2009 was a year of investment in the platform and in the products. That's paid off very, very well over the last 3 years. We exited 2012 with $96 million in EBITDA. Our guidance for 2013, put that at the midpoint of about $120 million, $122 million of EBITDA, close to 30% EBITDA growth in 2013. So although the pro forma has us at 18% of TSYS' revenues, my personal goal is to have a much bigger percentage than that over the years.

So with that, I think I'll hand Slide 15 back over to Troy. Troy?

M. Troy Woods

Thank you, Dan. Slide 15 summarizes why we think the combination of core assets and strengths of TSYS and NetSpend are so compelling. Fundamentally, we believe we are a great cultural fit. The beliefs and values of our 2 companies are aligned and consistent. We both believe that payments should revolve around people and not the other way around. We are both committed to improving people's lives and businesses by putting people at the center of payment. And people-centered payments is and will always be our brand promise.

And with that, I would like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of David Togut.

David Togut - Evercore Partners Inc., Research Division

I'm wondering given the structure of the transaction that you've outlined tonight, i.e. NetSpend really being a stand-alone company within TSYS and you haven't really talked about cost savings from combining these 2 companies, whether you considered instead entering into a long-term partnership with NetSpend to cross sell your services to TSYS customers instead of acquiring the business.

M. Troy Woods

Well, I wouldn't say, David, that we spent any real time thinking about just creating a marketing partnership. We are acquiring the entire company. There will be at appropriate levels and at appropriate times integration of certain services and some certain cost takeouts that you might expect. But at the end of the day, it is really not a consolidation M&A play. It is an innovation M&A play. As I indicated earlier, and I think Phil did too, that we've been in the processing business for a long, long time. We think the natural next step is to move closer to perform a transaction via the program management business. So we feel very comfortable about the structure of this transaction.

David Togut - Evercore Partners Inc., Research Division

A question, if I might, on management retention agreements for Mr. Henry and Mr. Harris.

M. Troy Woods

And the question is...

David Togut - Evercore Partners Inc., Research Division

The question is, are there management retention agreements for Mr. Henry and Mr. Harris?

Daniel R. Henry

Yes. Yes, there are.

David Togut - Evercore Partners Inc., Research Division

And what is the length of those agreements?

Daniel R. Henry

Well, we're employees at will, so there's really -- the length of the contract is kind of irrelevant. But there are some performance metrics in there that are going to keep -- let's just say this way, if either Chuck and I weren't personally committed to the growth and success of this business, TSYS made sure that we are financially committed to the growth and success of this business for a number of years to come.

David Togut - Evercore Partners Inc., Research Division

Okay, that's very encouraging. And I'm wondering, Dan, if you could talk about any efforts you have to diversify your business beyond Ace Cash Express, which I believe was about 1/3 of your revenue over the past year.

Daniel R. Henry

Well, I think we've done a pretty good job of diversifying over the last 5 years. If you look at that -- I'm digging for it now, the slide that I showed, had our channels, 5 years ago, when I showed up, I think the only icons there would have been HEB and Ace Cash Express. So over 5 years, several other -- Walgreens, Dollar General, InComm, Blackhawk, Intuit, BET Networks, PayPal, Cracker Barrel, Kohl's, Regions, M&T, UMB -- quite a significant growth in diversification across the business.

Dan McCarthy - Integre Advisors, LLC

I see. And just finally on financial terms, I guess if Jim's on the call, could you talk about the interest rate you're using on the debt to buy Ace Cash -- I'm sorry, to buy NetSpend, and whether that's a short-term financing or long-term? If it's short-term, what would be the rate if you take it out long-term?

James B. Lipham

David, right now, we have used kind of a blend of a short-term rate and long-term, long-term being like a 10-year rate. And we have been using around 2.70%, 3%, somewhere in that neighborhood. We have blended rate.

Operator

And your next question comes from the line of Ashwin Shirvaikar.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess my question is, was this a structured sale process? Were there other bidders involved? I mean, if you could give us some background on the deal as to why now?

Daniel R. Henry

It was not a structured process. We have been focused since our IPO of just your head's down, just execute on the business, execute on diversification, new clients and growth. And Troy came along and I think he brought a couple of folks with him on our second meeting and we kept talking. And we felt the transaction made a lot of sense. And our board approved this transaction at the value that was placed out there. So we feel very, very good about this result for the shareholders.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay. And I guess as you look at your -- at the biggest parts of the business, you mentioned the paycard business as being particularly, I guess, ready for some revenue synergies in terms of the merger or the acquisition by TSYS. Could you guys sort of size maybe what revenue synergy targets are in a 12- to 24-month time frame?

M. Troy Woods

Well, again we have not made those public and we're not really prepared at this time. We've certainly done significant modeling to look at not only -- someone asked a minute ago about cost synergies but also the revenue synergies that I talked on earlier. And I think at the appropriate time, as we move closer toward closing, TSYS will be in a position to discuss those, too.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay, I guess my last question is with regards to the accretion. Does that assume any either revenue or cost synergies at this point?

James B. Lipham

Very little. This was not a real synergy play, as Troy has mentioned. But we did have a little bit of synergy in there, but not much.

Operator

And your next question comes from the line of Greg Smith.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

On the TSYS side, do you guys plan on doing any sort of pro forma accounting or switching to maybe an adjusted EPS or cash EPS following this deal just given how much amortization there will be?

James B. Lipham

Greg, this is Jim. We are planning to do that, obviously with this -- we've said all along, we will move cash and share [ph] and talk a little about EBITDA. As we get into the acquisition, we'll all get more intangibles.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And Jim, do you happen to have the 2012 number handy, the amortization of intangibles related to acquisitions? If not, obviously I can get that later.

James B. Lipham

Hold on. I think I may have it. I think it's on one of the slides, in the last slide in the appendix.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay, I'll find it there. And then as we think about the potential here for global expansion, is that something -- have you guys put out feelers from that or have some of your banks talked about that? I'm just curious if that's something that's going to start from ground zero or is there a reason to think you can -- when you decide to do it, hit the ground running as far as expanding NetSpend's business internationally?

Philip W. Tomlinson

Well, Greg, as you well know, we have had some pretty good success globally. We're not there -- we're not here today saying that that's one of the keys. But obviously, long term, that is something that we'll look at and we think is possible long term. It's not in the short-term numbers.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then just the last question, what about potential conflicts now that TSYS is going directly to the consumer? Historically, you haven't done that. Your bank customers are doing that. You could see how there might be some overlap here. How do you think about managing any conflicts?

Philip W. Tomlinson

Sure, I mean, and we've got to -- we are a very large processor of other issuers who compete with NetSpend. We've been doing this for years. I mean, we have been processing large banks who compete with each other every day. We believe we know how to build a very strong wall between these 2 businesses. They will not be on the same platforms. That's one of the reasons that we like the idea that this business is in Austin, the rest of that business is in Columbus and Alpharetta, Georgia. And so there will be different people, different systems, and we believe that we've got not only a reputation for being able to do that, but we believe that our customers are confident that, that will work. Time will certainly tell, but like I say, Greg, we've been doing it for years.

Operator

And your next question comes from the line of Darrin Peller.

Darrin D. Peller - Barclays Capital, Research Division

Listen. This first question is on the -- relative to the cost synergies, I know you keep saying it's not a very big synergy play. But I mean, I can't get past the idea that you used to obviously be a bigger processor, an issuer processor on the Green Dot label. I mean, you have capabilities there and I would imagine you can be leveraging from a cost synergy standpoint as well for NetSpend now. I mean, is that something that we can assume should be an opportunity near term on the cost side?

Philip W. Tomlinson

I don't think it's a near-term opportunity. I think there will be some synergies and we're in the process of defining those right now. But as I think Troy and Dan both said that this is not a transaction that has to depend on synergies. We will certainly get some. But we -- but it's not -- I don't think it's going to be anything substantial or anything that's going to make a real difference in the early numbers.

Darrin D. Peller - Barclays Capital, Research Division

Okay. And then in terms of use of capital going forward, obviously, this is going to be the material transformational move that we've been waiting for, for a while. I know we've talked about this for a while. Going forward, I mean, could we still expect some buybacks in the summer? Is it pretty much going to be on hold for a while there? And maybe you can just talk about other longer term...

Philip W. Tomlinson

I would say -- I would not expect any for the near-term, for the foreseeable future. I mean, we want to work on, one, getting this thing very operable; and two, to reduce some of this debt. And then we'll be looking at that.

Darrin D. Peller - Barclays Capital, Research Division

All right. Just last question, in terms of the financials now. Obviously, you talked a little bit about GAAP accretion. And someone else asked I think a question about adjusted earnings reporting. When we think about your accretion on a cash basis, I guess, given the purchase amortization coming on, versus GAAP, I mean how accretive is it on a cash basis either on a cash earnings or a free cash flow per share basis? Can you give us a little bit color around that?

James B. Lipham

Well, we have kind of looked at that on a cash basis, it's probably going to be in the low-teens as a percent accretion.

Operator

And your next question comes from the line of Kevin McVeigh.

Kevin D. McVeigh - Macquarie Research

I wonder if we could just talk about the leverage a little bit. If I remember from last quarter, we're kind of talking 2x should be about $1 billion. So it sounds like this will take you up a little bit north of that. Just any thoughts on kind of appetite for leverage and then how should we think about paydown. It sounds like the buyback would be not a big factor going forward. But just any thoughts on capital allocation?

James B. Lipham

Yes, we'll -- that's why Phil was saying we'd probably put the buyback on hold for a little while as we bring the debt ratio back down. We'd like to kind of keep it around 2x EBITDA. So we'll be bringing it back a little bit during its first year.

Kevin D. McVeigh - Macquarie Research

Okay. And then just it seems like NTSP has done a real nice job growing through obviously what was a very tough time. I wonder if we could just get thoughts from management what drove that growth, particularly '08, '09. You said great growth on the EBITDA and revenue lines as well. And will we continue that strategy as part of TSYS?

Daniel R. Henry

Absolutely. Now I think if you look at our business, just our growth is continuing to be fueled by one, just the tremendous need for our products in this country. If you think about we have a little more than a million customers on direct deposit and the FDIC estimates there's 68 million unbanked, unhappily banked consumers in this country. So just the total available market is tremendous. And if we only get a small percentage of the total available market, we're going to have very significant growth. And our philosophy of just staying focused on our mission, our focus on partners and products that serve this consumer, we believe we have a lot of runway ahead of us with that for years to come

Kevin D. McVeigh - Macquarie Research

Sure. And then just real quick. How long did you folks kind of -- were engaged before this transaction came together?

Philip W. Tomlinson

Probably the entire holiday season.

Daniel R. Henry

It was a busy Christmas for a number of folks on both sides.

Operator

And your next question comes from the line of Jason Kupferberg.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Phil and TSYS team, just a question in terms of what your guys' view is on a couple of aspects of the prepaid space and specifically the program manager arena. I know there has been a lot more competitors entering that field because of the robust growth that it offers, as you guys highlighted. I mean, we've seen American Express and Chase and some others coming to the market pretty aggressively. So what's your view on what that might do to pricing, to consumer-facing pricing in the prepaid market going forward? And then just as an offshoot to that, there's obviously been some regulatory risk surrounding the industry for a period of time from the CFPB, for example. Just your comfort level with that part of the NetSpend model.

Philip W. Tomlinson

Jason, those are all good questions. And I think really the appropriate person to answer that is Dan.

Daniel R. Henry

Jason, we haven't had the opportunity. But trust me, we've had these conversations many, many times with our other analysts. First on the pricing standpoint, if you'll allow me, I think it's important to understand what type of products that we have. We're not selling gasoline or bread, where you're buying this consumable on a daily or weekly basis. This is a product very much like a bank account or an insurance policy. And so we believe that you have the best product, you can command the best price. And our price point, fully loaded in, at $5 a month. And when you take into account this consumer is able to get free P2P transfer, they get 5% interest on their savings, they feel very, very empowered with the instant wireless alerts, they get access to their direct deposit funds when they post as opposed to when they settle. We have a $10 overdraft cushion, where there's no fee or charge to that whatsoever. Our customers see our product as a tremendous value, and other products, they come on the market, when set next to ours, very much are just a stripped-down debit card, with just simple payment functionality without any strong features and benefits designed for this consumer and this consumer's needs. And so if you look at our growth chart of revenue and you see as we continue to grow in 2009, that's when Wal-Mart dropped the price of a card from $8 down to $3. Then you had 2010, 2011, we had the Durbin Amendment and the Gift Card Act. You had American Express launch online in 2011. And then, again, another relaunch, if you will, in 2012. Chase Bank came along at that time. So all through new interest in this space, all through a lot of regulatory chatter, we continued to grow our revenue and grow our customer base. And in terms of the CFPB I've had a lot of personal interaction with the folks at CFPB and I'm very encouraged with everyone I've met there to where they truly understand that banks in this country are designed to serve people with money. And so I want to be very, very clear here. There's -- what we do and the opportunities that we have and our growth potential does no mean should reflect poorly on banks. We don't really see ourselves as competing with banks. We see ourselves as competing with cash in the expensive cash-based economy. And the CFPB realizes that there is a need for the prepaid industry to serve this consumer who is locked in a cash world. And I've had numerous meetings, numerous conversations with folks at CFPB and talked about the products that we deliver and the customer we serve. And I've found them to be very, very supportive in everything that we do.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay. No, that color is helpful. Just another question for TSYS. I think from our perspective, it's not surprising to see you guys do a large acquisition. Obviously, you've been looking for something for a while. And my sense is that a lot of folks on the Street perhaps thought you might do something more in the Merchant Services side of the business. I mean, at the end of the day, were there just not adequate opportunities there? Or with NetSpend that's just kind of something that came on your radar pretty quickly and the more you guys talked, you realized that the potential fit there was even better than doing something more -- than something in your existing core, like Merchant Services?

Philip W. Tomlinson

Well, I think it was -- Jason, it was really a combination of all those. We have looked at a lot of properties not only in the merchant acquiring business but in other areas and internationally. And we have really thought about NetSpend for a long time really since the failed Cap One venture into it, and that sort of got our attention. And then you start looking at the fit. We think the fit and the financials are very compelling. And it gives us not only new products directly with the consumers, but it also gives us products that we can go sell to current customers and new customers. So it's -- I mean, we have liked NetSpend for a long time.

Operator

And your next question comes from the line of Bryan Keane.

Bryan Keane - Deutsche Bank AG, Research Division

I just want to ask about the valuation metrics you guys used to arrive at the $16 a share acquisition price.

James B. Lipham

Well, I mean, the valuation made, I mean, we were looking to have an accretive transaction in the first year.

Bryan Keane - Deutsche Bank AG, Research Division

No, I guess I'm curious if you used a certain P multiple, 13 or 14 or EBITDA or cash flow. What did you use to get -- to arrive at the $16? I just want to see if what you guys used and how you came -- arrived at the $16 price.

James B. Lipham

We had about 4 different prices that we kind of kept working at. And I guess Troy in his discussions with Dan, and we agreed on the price that happened to work out to be accretive.

M. Troy Woods

Look, Bryan, at the end of the day, we did the typical review that you would expect and looking at 4, 5 different metrics of market comparables, historical comparables, discount and cash flow. You name them, we've looked at all of them. We spent a lot of time talking to Dan and his management team and getting a good handle on this business. And you can't discount the fact that, as Dan indicated earlier, they were at the midpoint of their guidance. They're looking at a 19% top line revenue growth and a 30% EBITDA growth. And you put all those in a pot, you stir them up and $16 is the number we struck a deal on, and we feel good about it.

Philip W. Tomlinson

And really we don't have much skin left after dealing with Dan for [indiscernible].

Bryan Keane - Deutsche Bank AG, Research Division

Yes, yes. I'm sure. I'm sure. I've known Dan for a while as well. Let me ask you though, I was curious and interested to see the opportunity to create new partnerships with TSYS' bank customers. Have you talked to some of the TSYS customers and will that kind of look like a white label prepaid product? Maybe you could just talk a little bit about that.

Daniel R. Henry

I know TSYS is going to -- probably a little bit hard for them to do so, but we sure have in terms of where -- as I mentioned some of the banks that we have agreements with that we've announced and we have a handful of other banks that we're in conversations with. So I'm really interested in hearing some of the follow-up conversations with some of those banks tomorrow after they've heard of this transaction.

M. Troy Woods

And Bryan, this is Troy. Over time, we've certainly had discussions with some of our current customers as well as prospective customers to talk about TSYS helping them be more successful and us taking on some program management. And to be honest with you, we've been somewhat reluctant to do that de novo. We are very, very, very small in the program management space today with respect to prepaid. So as a matter of fact, I can look at that sheet that Dan addressed. I forgot what slide it was. But actually, it's Slide 1, and I can look at that particular sheet. I won't tell you who it is, but 2 -- I recognized right off the bat, 2 companies on that sheet that TSYS had conversations with. We just could not accommodate them. So they're out there.

Daniel R. Henry

And we have -- this is Dan. We call processor plus. And I'll just use Intuit as an example. Intuit had -- last tax season had a product. They were just using a pure processor. And what they realized in real short order is there's a lot more to this than just processing transactions. And so we're able to sit down with Intuit and talk about -- we'll run the back-end transaction but we will also provide customer service and fraud controls and marketing. We can really paint for them that they might give up some revenue, if you will, by paying more than just a processing fee. But they will more than gain all of that back and then some, just in terms of a larger customer base, a happier customer base and larger revenue and throughput per cardholder base. And so we're really chomping at the bit to be able to lock arms with TSYS and go into their current client base and see if anybody's receptive to our processor plus offering.

Operator

And your next question comes from the line of Roman Leal.

Roman Leal - Goldman Sachs Group Inc., Research Division

First for -- I guess, a few follow-ups. First, I know it's pretty early stages, but were you able to speak to maybe, Troy, any inclination or any conversations with banks, perhaps thinking about getting into prepaid and the process of doing it, where you thought of having this asset would allow you to leverage either the processing or the program management experience? I mean, are there actual cases where you think you can kind of get into right off the bat and try to get some revenue synergies there?

M. Troy Woods

Well, Roman, as I mentioned a minute ago with the question from Bryan, looking at that Page 10, I think, just looking at it, I'd recognize 2 names that we were in conversations with. And they eventually did something with NetSpend. We really could not accommodate them. So we do have conversations. And as Phil indicated too earlier, not only in the United States, North America, but globally. As you well know, we're scattered all over the globe, and there are opportunities for a product like this to serve the underbanked and underserved outside the United States. Now I think all of us has said we're not going to -- that's not priority 1 come day closing minus 1. But it is something on the radar. It is something that Phil indicated we have success at. So yes, we do believe that there are opportunities with not only outside the States with our customer base but also and we seem to be focusing primarily on just FIs, but remember again, that we believe there are opportunities with -- we have over 400,000 direct merchant relationships. And as I indicated earlier, we think some of those could be a very good reload location opportunity. We also process what we call managed accounts in our Merchant business for some of the large, large, large merchants in this country. And again, when you go back and look at page or slide -- excuse me, just a minute -- but Dan's slide on Page 1, and obviously that's just a snapshot. When you think of, I think Dan, you said 60,000 now, -- 60-plus thousand...

Daniel R. Henry

Retail locations, yes.

M. Troy Woods

Retail locations. Look, I can tell you, TSYS doesn't process for all 60,000 of those and we see that as an opportunity. If you are a reload location with NetSpend, if you have NetSpend cards hanging on a j-hook in your store, then you can bet your last nickel that they accept credit cards. And we want to be in there with Dan and Chuck and their team to see if we can't convince them at the right time to give us their acquiring business, the Merchant business. So we think there are a lot of revenue crossover and synergies to explore.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay. And as far as your due diligence, maybe when you were thinking about the potential risks here, obviously NetSpend's done a good job at executing against their plans. But the prepaid industry is getting a little bit more competitive. There could be pricing pressure, and obviously somebody else mentioned the regulatory risks. How did you get comfortable with the kind of the next 12 months or even the next 24 months in making this deal?

M. Troy Woods

Well, I think a couple of things, Roman. One, although a little different, I think everybody in this room would agree that TSYS has been in the competitive pricing business for a long, long, long, time and you know who our competitors are. And if you were to go back and look at the price per account that we got back in 1983 when we started business 30 years ago this year and look at the price per account today, it's different. It's less. But yet our margins are as good or better, we've grown the company, et cetera. So you get creative. You do things different. You find different avenues. And look, TSYS has not gone into this transaction with their eyes shut. We spent a lot of time talking to certain regulators. We've had a lot of people help us looking at the competitive environment. We've had a lot of people looking with us and talking with us about the regulatory environment. And I think Dan did a great job a minute ago talking about the pricing and the competitive situation. Now at the same time, we're not flippant about it, but I think we got comfortable enough that the timing was right to make this move and make this transaction.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay, last one for me. In your Investor Day, you laid out a target of becoming a top 10 global acquirer by 2015. Is -- I think that's why it feels like all of us on the call thought you would do a sizable deal in acquiring. This appears to kind of take that off the table. So would you -- are you kind of backing off on that goal that you stated in your Investor Day?

Philip W. Tomlinson

I don't think we're totally backing off that by 2015. We're backing off for the next...

M. Troy Woods

Year or 2.

Philip W. Tomlinson

Year or so, obviously. And the truth is, Roman, we've looked out there and we're going to have to grow it more organically. We made 2 acquisitions or we did 2 acquisitions last year, one in California that added a really unique sales process. And then in December, we added another company out of Utah, ProPay, that you'll recall, that added some unique features and products that we felt like our business needed. So we've continued to add value to those businesses. But I think I talked about this last time, the idea of just going and trying to buy the biggest guy that we could buy out there in the Merchant Direct business is really not what we were looking for. We think we can grow that business. We think we're very competitive. But we all are opportunists to some degree. We took a flyer on talking to NetSpend and it caught life and it's worked out for us. And we're very excited about it.

Operator

And your next question comes from the line of Andrew Jeffrey.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Just a couple of quick ones for me. One, as you look forward now as a combined company, Dan, you'd obviously focused on standing on some new channels. Did the investment priorities or the absolute level of investment change at all given that you have more resources now as a combined company than you did as a stand-alone company?

Daniel R. Henry

Well, I would certainly say I don't see them dropping by any means. So we've got our 2013 plan and beyond set that Troy and Phil have tasked us to hit or exceed. And I think what I get excited about is being part of a company the size of TSYS may afford us the ability for maybe larger investment and opportunities if we come across and if need be. But at this point, our plan in 2013 and beyond is locked.

Philip W. Tomlinson

Yes, I agree with what Dan said 100%. We have great cash flow, we have the ability to invest in new products, new features. We continue to do that on an annual basis in all of the categories which we compete. We have to in order to be successful. If you're not investing money these days, you're not going to be successful long term. So we think that we will bring some strength to NetSpend, although they've got a very strong cash flow. And we think we can help in a lot of areas like that. But it's -- to us, it's an incredibly exciting business. I don't want to -- you guys are a pretty tough crowd. I even hesitate to bring this story up. But after the all-hands meeting, I was talking to one of the employees here and it was -- it kind of touched me really at how passionate these folks are about serving this segment of the consumer. This guy was a Russian immigrant and he talked to me a long time about he would have moved back to Russia. He wanted to live in Texas. He would have moved back to Russia if he could have bought an airplane ticket. He couldn't buy one. Nobody would give them any credit. Nobody would -- the airlines didn't want to take any cash. He couldn't get a gas card. He couldn't get a retail card. And he got a NetSpend card. This happened an hour ago. And it allowed him to start what he said, "living like I was supposed to be living and it allowed me to manage my money safely." And he actually came over and applied for a technical job over here. He's been working here about 6 years now. And that's as poignant a story as I could have ever heard, and it was absolutely unplanned. I just -- we were talking about Russia and we have about 85 people in Moscow. And he was somewhat surprised to hear that. That's when he told me his story. So these folks here are passionate about what they do, and we're passionate about what we do. And I think when you put these 2 teams together, it will be something really special. Sorry to get preachy on you guys, but I just had to tell you that story.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

No, I think that's a great anecdote, and Dan and company have definitely built a well-differentiated product. And just as a last one. I know it's early days here, but TSYS does process for one of NetSpend's very large competitors. Any thoughts on how that relationship changes or doesn't change in light of this deal?

M. Troy Woods

Well, Andrew, you're right. We all know who that is. And they have been a long and valuable customer of TSYS for a long time, as I've said. We have a great relationship with them. I think we all know where Green Dot was at least several quarters ago with some of their planning about what they might do longer term with respect to the platform. But look, we are encouraged that we can keep their business. We want to keep their business. We appreciate their business. And we're all hopeful that they will find their way to stay at TSYS from a processing perspective for many years to come.

Operator

And your next question is from the line of Wayne Johnson.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Exciting announcement, and I'll keep my question short here as the hour is late. So just on the -- so on the NetSpend money transfer side, so if I understand correctly, that's up to $1,000 free person-to-person. That's just within the U.S. That's not international, is that correct?

Daniel R. Henry

Yes, absolutely domestic only.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay, great. And my apologies. I'm not a NetSpend analyst. But on a free cash flow basis historically, could you just give me some direction here on what that rate of growth was on a normalized basis? And what was the absolute figure of the free cash flow in 2012?

George W. Gresham

In 2012, the free cash flow was about $50 million. That's adjusted for a particular unique event that occurred in the first quarter of 2012, where we had a settlement associated with a patent case. So I've adjusted that out in the number I just gave you. But the long-term growth rate in free cash flow has been equivalent to or exceeding our earnings growth, particularly due to the fact that relative to other payment companies, we have a relatively modest CapEx profile. We've been spending about $10 million a year or so in CapEx. With one exception, that stayed around that level. So that's allowed cash flow to grow at a rate somewhat better than actual earnings growth on a pretax basis, of course.

Operator

Your next question is from the line of Larry Berlin.

Lawrence Berlin - First Analysis Securities Corporation, Research Division

Just one quick question because the rest have been answered. You guys have your own platform, obviously, for processing for Green Dot, and NetSpend, I believe, has 2 platforms, which they were merging into 1. Do you expect to then add their platforms on to yours, or use 2 or too early to think about that so far?

James B. Lipham

I don't think we expect to add it on. Larry, let me explain why. It was just what Troy was talking about a minute ago. I mean, we have great customers in the prepaid processing space at TSYS. And I don't think they would be very comfortable sharing the same platform and the same space with -- with one of their -- with a competitor that is a part of TSYS.

Operator

And your next question is from the line of Par Singh [ph].

Unknown Analyst

A question on deal structure. Are there any protections built into the agreement in the case of a regulatory change?

M. Troy Woods

Well, again, we're not going to get into the details of any conditions in the merger agreement.

Unknown Analyst

And then just any general comments on sort of regulatory approvals required for the deal?

M. Troy Woods

There are 2 primarily regulatory approvals. One, obviously, we've got to go through the money transmitter license process to get those due to the change in control. And we'll certainly have to deal with the HSR approval.

Philip W. Tomlinson

I think that's really all the questions that we have in the queue. And Troy, I don't know if you want to say anything? Dan, anybody, before I close this out?

M. Troy Woods

No.

Daniel R. Henry

I just want to say thanks to Phil and Troy and everybody at NetSpend for just the tremendous work that they've done. So I can't say how excited we are about this. Thank you.

Philip W. Tomlinson

Well, and we feel the same way. We think this is going to be a really good marriage, and we're excited about it. We think it makes a lot of sense. It makes sense for NetSpend. It makes sense for TSYS. It makes sense for our customers and our shareholders. And we are -- we like that combination an awful lot. So we're excited about it. We hope to get this closed out in a reasonable amount of time. And we really do appreciate you being on this call with really obviously short notice. It means a lot to us. And thank you for your interest and support. And with that, we'll call it a night. We'll be off the phone. Thank you.

Daniel R. Henry

Thanks, everyone.

Operator

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

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Source: Netspend Holdings, Inc., Total System Services, Inc. - M&A Call
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