Here Is Why the Blackstone-ADS Deal Is in Trouble

Posted by Heidi Moore, WSJ DealJournal:
A lot of private-equity firms probably would be happy these days to have an excuse to walk away from a $7.8 billion deal. But Blackstone Group insists it is clinging tight to the dream of acquiring Alliance Data Systems – no matter what Office of the Comptroller of the Currency says.
The OCC appeared to deal a death blow late Friday to Blackstone’s hopes of acquiring the credit-card processor by setting down requirements that Blackstone refused to meet. Blackstone said the OCC wanted the firm to take on “operational and financial burdens…that cannot be reasonably assumed.”
In wake of that announcement, ADS shares have shed more than $22, or more than 34%, to $43.23 this morning, well below the $81.75 a share Blackstone agreed in May to pay for the Dallas company.
What requirements could be so harsh as to endanger a deal for which Blackstone already had set up financing? What the OCC required, according to a person familiar with the matter, is for Blackstone to guarantee itself as “the source of strength” for ADS’s bank operation.
What, you didn’t know ADS had a bank? Actually, it owns World Financial Capital Bank, an industrial bank with a Utah charter, which puts the company under the regulatory oversight of the OCC as well as the Federal Deposit Insurance Corp. ADS cited World Financial Capital in its most recent quarterly filing as one of its four main sources of funding. The OCC wanted Blackstone to bail out ADS in the event of any trouble – with no size limit to the bailout.
Given the scary press recently about the possibility of the U.S. slipping into recession and the general dismal state of the financial sector lately, it isn’t surprising that Blackstone declined.
Blackstone will continue to talk to ADS about doing a deal, this person says, and will take up a previously mentioned plan to restructure ADS so that the acquisition can go through.
It is a good thing, too: ADS today said Blackstone would have no grounds for walking away from the deal according to the merger agreement, and added that Blackstone should continue negotiating with the OCC.
Merger-structure wonks might be excited about what comes next. What Blackstone and ADS have discussed–and avoided so far–is a move that would somehow transfer World Financial Capital to another institution. (No word on what that institution might be, however.) A partial acquisition might be better than none at all.