NetSpend in Play: Green Dot or Capital One could be Buyers

Rumors are circulating that NetSpend (NTSP) will soon be purchased by one of its competitors.

Shares of NetSpend fell below $5 last week. The Federal Reserve has placed an enforcement order upon NetSpend’s largest share holder.

Analysts think that Green Dot and Capital One are the entities most likely to want to bid for their shares. NetSpend shares have jumped in the last week. The company now has a market capitalization of approximately $500 million. Green Dot had $172 million in cash at the end of June. Capital One reported that it had $46 billion in cash.

NetSpend Makes Big Changes to its Equity Structure

This makes the news that NetSpend has restructured its equity all the more interesting. Last week, NetSpend released an 8-K revealing that JLL Partners, a New York private equity firm, would trade some of its common stock for a new position in Class A preferred shares. Each new preferred share can be exchanged for 10 shares of common stock. Through a series of stock repurchases, JLL has come to own about 24.9 percent of NetSpend’s stock. Were they to own 25 percent, the firms would face additional regulatory obligations. After this transaction, two different JLL subsidiaries will own 700,000 shares of preferred stock and slightly less than 15,000,000 shares of common stock.

The new shares will have some liquidity constraints. The terms say that preferred shareholders can convert their stock to common stock whenever they want, provided that the new concentration of common stock would not give that shareholder more than 24.9 percent of common stock. In other words, NetSpend will have to issue more common stock before JLL can fully exchange all of its preferred for common.

That liquidity issue would not be a problem in the event that NetSpend was sold to another entity.

Other JLL News

JLL has been in the news lately. The Federal Reserve Branch of Dallas indicated that it had reached a written agreement with JLL Associates G.P. FCH, L.L.C., New York, New York; JLL Associates FCH, L.P.; JLL Partners Fund FCH, L.P.; JLL/FCH Holdings I, L.L.C.; and FC Holdings, Inc.,. The agreement concerns the ongoing viability of First Community Holdings (FCH), the parent entity of First Community Bank, located in Webster, Texas. The Federal Reserve wants JLL to use its resources to prop up FCH.

JLL has many other investments. Their other positions include a stake in Ace Cash Express, a national payday lender. The JLL-Netspend-Ace Cash Express partnership is a downmarket version of the Warren Buffet-American Express-CostCo linkage.