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Credit: Reuters/Brendan McDermid By Jochelle Mendonca and Aditi Sharma BANGALORE | Tue Aug 23, 2011 12:35pm EDT BANGALORE (Reuters) - Less than a year since it went public, NetSpend Holdings Inc's depressed stock price and cut-throat competition in the pre-paid debit card market make it a potential takeout target. Pre-paid cards -- targeted at low income and under-banked customers -- grew significantly during the economic downturn, but the card market is now over-crowded and has attracted regulatory scrutiny, priming the sector for consolidation. Credit card giant American Express and payment processor MasterCard have both entered the pre-paid debit card space, and other financial companies are taking a close look, hoping to tap a broad source of fee-income, but making competition tougher. Shares in NetSpend, which has lost some distribution partners and seen slower take-up of its cards, have spent most of the past six months below its $204 million October IPO price of $11. The stock price this month dipped below $4 to a life-low. "NetSpend could be a strategic fit for other card companies, a direct competitor, or even private equity," said Sterne Agee analyst Greg Smith. The likeliest buyer is Green Dot Corp, NetSpend's main rival in a U.S. pre-paid debit card market that Mercator Advisory Group forecasts will next year have funds of $118.5 billion -- more than treble the 2010 total. MasterCard recently forecast pre-paid volumes would top $840 billion by 2017. "Green Dot would be a usual suspect here. I don't see any reason why these companies should butt heads instead of getting together," said Darren Chervitz, director of research at Jacob Asset Management, and a former holder of NetSpend stock. While Green Dot has been insulated from some of the fierce competition due to its relationship with Wal-Mart -- which brings in nearly two-thirds of its revenue -- the same tie-up also makes it highly dependent on a single customer. "You have to wonder if that's a long-term relationship you really want to tie your horse to because, clearly, Walmart has the leverage in that relationship," Chervitz said. NetSpend has had some challenges retaining partners, but it does have a more diverse client base. Its largest client, ACE Cash Express, accounted for just a third of its 2010 revenue of $275 million. "Green Dot is in a position to do a very accretive acquisition given where NetSpend is right now," said Wedbush analyst Gil Luria said, noting the market is pricing in a possible buy-out of NetSpend. "The stock has been volatile and, on the days it's up, it's my view that people bid it up because they feel the company is going to get sold," Luria said. NetSpend may also attract interest from Capital One, which tried to buy the company four years ago, Luria said. WHAT PREMIUM? NetSpend's cheap stock valuation -- it trades at 12 times forecast 2012 earnings, compared with 20 times for Green Dot -- is likely to attract buyers, but the company may struggle to get what it thinks is the right price. "I don't think management would be interested in anything less than a 30-40 percent premium to even get the conversation started," said Luria at Wedbush. But the headwinds the company faces may leave it with few bargaining chips, and, while Green Dot's market value is more than triple NetSpend's, it's unlikely to want to offer a big premium. "I don't think they're (NetSpend) in a position to demand too much," said Chervitz. "If you assume a 20-30 percent premium, you're starting to come to a comparable valuation, which is like a merger of equals. I'm not sure that's something Green Dot would want to do." If a deal gets done, it could signal a slowdown in growth for the pre-paid card sector as a whole. "If you saw a deal happen, it's not a bullish thing," said Chervitz. "It probably says Green Dot is seeing some of the stress that NetSpend has seen, and sees the need to build up scale inorganically." (Reporting by Jochelle Mendonca and Aditi Sharma in Bangalore, Editing by Ian Geoghegan and Anil D'Silva) Technology Deals Global Deals Review: 2011 Q2 Global Deals Review Inflows Outflows Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (1) ChrisBelAir wrote: Not sure Green Dot would want to acquire NetSpend right now as, although they are in the same space, they have different models. NetSpend’s cash flow is generated from a myriad of fees which Green Dot does not charge. To pay a premium on a valuation where you know if you apply your own model such would be dramatically discounted is difficult. Add that to the trouble NetSpend may be in due to the Florida AG lawsuit (they are far less transparent than Green Dot — which should have no problem clearing their name) and you have a lowered probability. FINALLY, nothing will happen from Green Dot’s end until the book is closed on its Bank acquisition — as it can not change itself significantly without restarting its application, as to which any form of deal with NetSpend would likely cause to occur. Aug 23, 2011 2:23pm EDT -- Report as abuse See All Comments » Add Your Comment Social Stream (What's this?) 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