Alliance Data Sues Blackstone For $170 Million "Breakup Fee"

Implications: Blackstone Capital Partners V L.P. may have had a case of "buyer's remorse" with its $7.8 billion deal including the assumption of certain debt of ADS. The deal valued ADS at $81.75 a share, representing a premium of about 30% over ADS's closing price of $62.96 on 5.16.07. However, since that time ADS's share price has fallen to $52.84 a share as of 4.18.08. ADS is alleging that Blackstone "refused to accept reasonable and customary regulatory requirements and prolonged negotiations with the OCC," which resulted in a breach of the deal. ADS is seeking the $170 million "breakup fee" Blackstone agreed to when it entered into the deal with ADS on 5.17.07. The deal was expected to close by year-end 2007, however, due to lack of liquidity at Blackstone, the deal was delayed for a second time and ADS is suing Blackstone for "breach of contract." The deal was touted as a marriage amongst a leader in card processing with Blackstone's investment expertise would create a powerful partnership.

Analysis: Blackstone's plans to acquire ADS for $7.8 billion (including certain debt) has collapsed and heads to N.Y. Supreme Court with ADS alleging "breach of contract" and seeks the $170 million "breakup fee." This is the second deal that has collapsed for Blackstone in 2008, as the buyout firm shifts its focus to doing more midsize deals and minority stakes. When Blackstone and ADS entered into a deal on 5.16.07, the deadline for the deal to close expired on 4.17.08 and with egos in toe, Blackstone and ADS will let the courts decide if Blackstone "breached" its obligations and if so, is ADS entitled to the $170 million "breakup fee"?

1.  ADS's clients use ADS's loyalty and marketing programs to grow their bottom line and ADS offers one of the most comprehensive database marketing services, including analytics services, database services, data services, interactive delivery services, strategic consulting and creative services to drive customer loyalty for its clients

2.  ADS was contacted by Blackstone on Friday 4.18.08, indicating they were terminating the proposed $7.8 billion purchase agreement, however, Blackstone's termination notice may be invalid and Blackstone could be in violation of the terms of the contract because the contract stipulates Blackstone would pay a "breakup fee" if the deal collapsed

Takeaway:  Blackstone may have used the regulatory issue as a smokescreen to terminate the deal with ADS. Perhaps Blackstone had a case of "buyer's remorse" and decided that the buyout was too expensive in the current global credit crisis, which has made it more difficult for private equity firms to obtain financing. However, Blackstone is placing blame at the front door of the OCC, which requires that parent companies of a bank agree to provide support to maintain the bank's minimum capital and liquidity levels in cases when the controlling owner of a national bank is not a regulated bank. Blackstone purports the OCC regulations would impose a liability to the company and its funds and Blackstone decided to terminate the deal.