Blackstone’s pending $6.4 billion acquisition of Alliance Data Systems, a major credit card processor, may become an unexpected victim of the credit crunch. The deal is foundering not for the usual reasons, such as difficulty in raising debt financing or a change in business conditions leading the buyer to try to renegotiate the deal.
In this case, the Office of the Comptroller of the Currency, put unanticipated, tough conditions on the sale. While the problems the parties are facing are unique to this deal, it has sent a chill through the buyout industry. What other sorts of weird impediments might suddenly emerge?
Note it may be possible to salvage the transaction, for example, by excluding the Alliance’s World Finance bank subsidiary from the sale.
From the New York Times:
The turbulence on Wall Street threatened to claim another victim on Monday as the Alliance Data Systems Corporation, the big credit card processor, warned that its proposed $6.4 billion buyout might unravel.
The Blackstone Group, which agreed to buy Alliance Data last May, told the company on Friday that bank regulators had placed “unprecedented and unacceptable requirements” on the acquisition, Alliance Data said…
Blackstone said in a statement on Monday that the Office of the Comptroller of the Currency, a federal banking regulator, had placed onerous requirements on the deal but that the firm would continue to work with Alliance Data to win the approval of the comptroller. But Blackstone reiterated that it regarded the regulator’s requirements as a deal-breaker….
Monday’s announcement may set up a bitter legal fight, like those that arose after the collapsed buyouts of Sallie Mae and United Rentals. In its statement Alliance Data strongly denied Blackstone’s assertion that the deal could not be completed and said its board was “evaluating the company’s possible courses of action.”…
The situation has added complications because Blackstone has not blamed Alliance Data for breaching the deal agreement, which remains in effect. Neither side has acknowledged any problems related to the deal’s financing or the company’s financial health, an argument that has led to the crumbling of other buyouts.
But the agreement specifies that both parties must use their “reasonable best efforts” to win regulatory approval. Both sides saw the chance of a rejection by the comptroller’s offce as so remote that no specific clause was written into the deal agreement, people briefed on the matter said.
Since June, bankers and lawyers for Alliance Data and Blackstone have huddled with regulators in Washington to win approval of the deal. The blessing of the comptroller was required because of its authority over the World Financial Network National Bank, the institution that handles Alliance Data’s credit card services.
But those negotiations began disintegrating around November, as the subprime mortgage crisis escalated, according to these people. With major banks announcing steep drops in their capital levels, the regulator had become nervous about heading off future problems.
On Wednesday, the comptroller’s office made clear its requirements for approval. They included a demand that Blackstone guarantee an unspecified amount of capital and liquidity to the Alliance Data bank. The big factor, according to people with knowledge of the matter, was that the requirement would apparently last indefinitely, even if Blackstone sold the company or took it public again.
Several options may still remain, including potentially shedding the World Financial bank to satisfy the comptroller’s concerns.