Credit Concerns May Doom Blackstone’s Purchase of Alliance Data

One of the biggest DM deals of 2007 hit a significant, if not fatal, roadblock when a group led by The Blackstone Group had serious second thoughts about its acquisition of Alliance Data Systems Corp.

In mid-May, Blackstone agreed to purchase all outstanding common stock of Alliance Data for $81.75 a share. The total value of the deal, which included debt assumption, was $7.8 billion. Alliance Data runs the Air Miles coalition loyalty program, Epsilon data and marketing services, and a variety of credit underwriting, credit card and risk analysis functions, as well as other operations.

But as of Tuesday the deal appeared to be off. While Blackstone didn’t cite specific concerns, on Friday it sent a notice to Alliance Data saying that regulatory changes dictated by the Office of the Comptroller of the Currency (OCC), a federal agency that controls banks, made the deal too onerous to complete.

According to a statement issued by Alliance Data, Blackstone said the OCC demanded “that extraordinary measures be taken by ADS, [acquisition partner] Holdco and Blackstone that cannot reasonably be assumed.” Alliance’s release was unclear about whether Blackstone listed any of the measures it would be required to take.

Alliance Data disputed Blackstone’s claims that OCC’s rulings represent the regulatory organization’s final position, that the measures the OCC is demanding would create exceptional burdens on the purchasers, and that Blackstone is materially unable to conclude the deal.

What made the deal turn sour? While Blackstone is claiming changes in credit regulatory practices, market conditions have changed since May 2007. The credit industry has come under increased scrutiny, and the amount of cash available to complete such deals isn’t flowing as freely as it was eight months ago, when the purchase was announced.

Furthermore, the acquisition simply might not be worth as much to Blackstone as it was when the deal was signed. “In today’s market, consumer debt related businesses are not valued as highly as they were before the recent crises,” said Matthew B. Kratter, senior vice president at investment banking firm Petsky Prunier LLC.

On Monday, Alliance Data’s stock price fell from $65.60 per share to $42.28 after the news of the merger collapse hit Wall Street.

Alliance’s statement further noted “Blackstone’s notice [to Alliance on Friday] did not assert any breach of the merger agreement by Alliance Data or the occurrence or anticipated occurrence of any material adverse effect on the company…Neither did the notice reference or take issue with the financial or operational performance or liquidity of Alliance Data or its banks, or the parties’ ability to obtain Federal Deposit Insurance Corporation approvals related to the company’s industrial loan corporation.”

Alliance Data is “evaluating the company’s possible courses of action and will pursue those that best protect the interests of the company and its stockholders,” the statement concluded.

To put it another way, Alliance isn’t giving up its payday without a fight. According to Reuters, the agreement contained a $170 million break-up fee if the deal failed to materialize.

But that may not be enough to satisfy Alliance. As demonstrated by the dramatic drop in the stock’s price, stockholders would likely benefit by the deal going through. Alliance Data did not indicate which options it was considering.