RPT-IPO VIEW-Green Dot IPO gets valentine from Congress

Sun Jul 18, 2010 12:38pm EDT

(Repeats to additional subscribers)

* Prepaid cards to grow more than 13X by 2012-Mercator

* Green Dot not subject to new finreg debit rule

* Tiny prepaid market ripe for growth-analysts

* New Wal-Mart contract has much higher 22 pct commission

* All IPO shares from selling shareholders

By Maria Aspan and Clare Baldwin

NEW YORK, July 16 (Reuters) - Green Dot Corp (GDOT.N), a prepaid debit-card company, could see strong demand for its initial public offering this week because of the financial reform bill, which exempted prepaid cards from its harshest restrictions.

Green Dot is the top player in the prepaid debit card industry, and hopes to raise about $128.98 million in its IPO.

The company sells prepaid debit cards to young, low-income consumers. Such consumers typically rely heavily on cash and do not have much access to credit.

Research firm Mercator Advisory Group has predicted that Americans will load as much as $118.5 billion onto prepaid cards by 2012, compared with $8.7 billion they put onto such cards in 2008.

Financial reforms, passed by Congress on Thursday, could help Green Dot [ID:nN15226910]. One provision restricts debit processing transaction fees, known as "interchange fees," that banks receive from merchants.

Some banks, faced with the prospect of losing that revenue, have said they may start charging consumers additional fees for their debit cards or checking accounts. [ID:nN09186068]

Exempting prepaid cards from those limits gives them a competitive advantage.

Interchange fees made up 30 percent of Green Dot's operating revenue in the first quarter of this year.

The company will also benefit from having renewed its contract to distribute its cards in Wal-Mart Stores Inc (WMT.N) until 2015. Wal-Mart took a minority stake in the company as part of that deal.

"Now is probably a good time for (Green Dot) to establish a market for their shares because they've dodged a bit of a bullet from a regulatory perspective and have just solidified an extension of their Wal-Mart relationship," said Duncan Douglass, a lawyer at Alston & Bird who specializes in payments.

Wal-Mart accounted for 63 percent of Green Dot's total operating revenue in the quarter that ended March 31.

Fast growth and the reform bill may help investors swallow a valuation that is high relative to competitors. Green Dot hopes to sell 3.85 million shares for between $32 and $35 each. Based on the midpoint of that range, the company has a price-to-earnings ratio of 38, according to IPOdesktop.com President Francis Gaskins.

Visa Inc (V.N) has a price-to-earnings ratio of 22, but is a more mature and branded company, according to Gaskins.

TINY MARKET

Green Dot is the largest player in the prepaid card market, with about 3.4 million active cards in its portfolio as of March 31. That number is minuscule compared with some of the largest credit card lenders. JPMorgan Chase & Co (JPM.N), for example, had almost 90 million open credit card accounts at the end of the second quarter.

Such a tiny market has more room for growth, in part because some consumers are using debit cards to limit their spending, even if they have credit cards, analysts have said. [ID:nSGE6570P5]

"The company is small enough at this point that if it can continue to increase its penetration it can grow a lot, even if consumer spending weakens. I think the question is going to be more how many customers it can get and whether it can maintain those customers over time," said Nick Einhorn, an analyst with Connecticut-based Renaissance Capital.

Another prepaid card company, Netspend Holdings Inc, on Thursday filed for an IPO worth up to $200 million.

Green Dot does not charge any overdraft fees or require a minimum balance, according to its website, but it does have a monthly fee or monthly usage requirements in lieu of the fee.

Green Dot did not immediately return a call for comment.

WAL-MART, NO NEW SHARES

While Wal-Mart's massive scale has helped Green Dot, the relationship is expensive and analysts said Green Dot needs to reduce its reliance on the discount retailer.

Green Dot's new contract with Wal-Mart states that it will pay an estimated 22 percent commission, up from the 5 percent to 7.9 percent commission it previously paid, according to Green Dot's filing with the U.S. Securities and Exchange Commission.

The uptick in commissions means that past financial statements, which show sequential revenue and income growth over the past five years, are not a good gauge for future performance.

Renaissance's Einhorn said the fact that Green Dot would not be making any money in the IPO and all of the shares would be sold by current shareholders could also give investors pause. But, he added, the company does not need the cash new shares could bring.

Total Technology Ventures and Chief Executive Steven Streit are selling the most shares. Venture capital firm Sequoia Capital, which owns 31.9 percent of the company and is the largest shareholder, is not selling any shares. (Reporting by Clare Baldwin and Maria Aspan)

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