Who can prize private label cards from Alliance Data?

By Brenton Cordeiro

BANGALORE (BestGrowthStock) – Alliance Data’s (ADS.N: ) private label credit card business could be available on the market soon, carrying a possible price tag of as much as $2.4 billion.

The business, which provides private-label credit card services to retailers, has seen a steady decline in charge-offs and delinquencies from last year and could be coming on to the radar of companies looking to expand in this field.

Offers could come from top credit card issuers including JPMorgan Chase (JPM.N: ), American Express (AXP.N: ), Capital One (COF.N: ) or Discover Financial (DFS.N: ).

GE Capital and HSBC (HSBA.L: ) are major players in the private label credit card business.

“Some institutions have articulated a strategy to grow in private label, and Alliance Data has a pretty nice niche business there,” said Keefe, Bruyette and Woods analyst Sanjay Sakhrani.

The business has notched up $386 million in operating income through the first three quarters of this year, topping the $282 million it earned in the whole of last year.

“My guess is that this will become one of those things that may be a very desirable piece that one of the big players out there would want, given the lack of growth in their own businesses, but (an offer) would have to be extremely compelling,” Alliance Data CEO Ed Heffernan told Reuters in a recent interview.

“We always get approached. I’ve been here 13 years, and we’ve been approached 13 years in a row.”

Potential bidders would have to factor in that the business has begun to show an improvement in credit quality — and things are likely only to get better from here.

“We believe Alliance Data would consider the sale for not less than about 10 times forward earnings — which would be between $2 billion and $2.4 billion,” said Robert Napoli, analyst at Piper Jaffray.

Alliance Data operates two other divisions, Epsilon, a full-service marketing segment that offers services like consumer database marketing, email and consulting; and LoyaltyOne, which provides loyalty marketing services such as the AIR MILES reward program in Canada.

Alliance Data, itself, is hunting for small deals.

In June, it bought credit reporting company Equifax Inc’s (EFX.N: ) direct marketing services for about $117 million.

Heffernan said one or two “tuck-in” acquisitions, worth around the same as the Equifax deal, could possibly happen in 2011, most likely for its Epsilon division.

“We would look to continue to fill out, or what I would call put some meat on the bone, at Epsilon and supplement its double digit organic growth with one or two tuck-ins to beef it up,” Heffernan said.

“Epsilon will continue to be our shining star probably over the next couple of years, for sure.”

(Reporting by Brenton Cordeiro in Bangalore, Editing by Ian Geoghegan)

Who can prize private label cards from Alliance Data?