NetSpend intend to sell its shares in an initial public offering, according to documents filed by the Austin, Texas marketer of prepaid cards. Their plans follow the path laid out earlier in the year by Green Dot. Green Dot’s IPO is this week, and early indications suggest that there is a lot of demand for their shares.
There are some risks for investors that want to consider these shares. I’ll divide them into two categories…purely financial, and other.
Purely Financial
There sure is a lot of dilution going on here. NetSpend is going to have about 84 million shares on the market. Plus, there is significant overhang: insiders have another 12.5 million options that would be in the money at prices between $1.29 and $3.78. Most of the shares are in the money at $3.51.
I don’t understand the logic of using proceeds to pay debt. NetSpend should save about $4 million per year in interest expenses by paying down its debts, as it will probably do with at least some of the money from the IPO. However, their current cost on that debt is low. The weighted cost is just 6 percent. When ROE is at least 11 percent, what sense does it make to pay down cheap debt?
Other Issues
MetaBank: There is the issue of MetaBank’s ongoing status. NetSpend acknowledges the problem, albeit in just one sentence (more…)