Is eFunds Holding Out For the Highest Bidder?

Implications: Key Implications: eFunds share price has surged by 26% since its announcement in May 2007, of its plans to consider a merger, strategic partnership or buyout as rivals Fidelity and Fiserv throw their bids in the mix, each bidding $1.5 billion for eFunds and as other suitors gear up to bid for the electronic debit processor, who is weighing its options after reporting 1Q07 results and the loss of a multi-year contract with MasterCard that ended abruptly and the roll-off of a contract with Bank of America. eFunds 1Q07 net income took a dip by 1.4% to $10.5 million, which is down from $10.7 million during the same quarter in 2006.  eFunds revenue also declined by 4% to $134 million, down from $140 million in 1Q06 and last week N.Y. hedge fund Scoggin Capital Management announced that it has acquired a 6.8% stake in eFunds.  As eFunds mulls its options, eFunds inked a "Prepaid" Contract with Amex that is scheduled to rollout in 3Q07, in time for the holiday season. 

Analysis: Comments/Perspective:
The bidding frenzy has begun for electronic debit processor eFunds, as it mulls over its options following a dip in 1Q07 earnings and the loss of two major contracts with MasterCard and Bank of America. eFunds 1Q07 results was hampered by a roll-off of a "Prepaid" Contract with Bank of America and the loss of a multi-year contract with MasterCard to provide debit processing services to financial institutions (FIs).  eFunds has filed suit in Arizona Superior Court, arguing MasterCard improperly ended the contract, which was a breach of the contract, breach of the covenant of good faith and fair dealing and fraudulent inducement.  eFunds has formed a "Review Committee" to consider all options for eFunds and Fidelity and Fiserv has already threw in their bid for eFunds during the first round of bidding.

1.  As the payments processing industry trends towards consolidations and spin-offs and announcements occur on a regular basis such as the First Data buyout by private equity firm KKR, and the pending spin-off of Discover from Morgan Stanley and Metavante from M&I, its a strong indication that more consolidations may occur in the industry.  eFunds is in a transition phase as it considers a sell-off after being approached by financial parties and rivals to explore mergers or other opportunities that may build greater shareholder value for its shareholders

2.  eFunds has several options to consider as the review process goes forward: 1. eFunds can stay the course and remain a independent company, 2. merge with a strategic partner or 3. accept a buyout by a private equity firm, who could provide the capital to expand its infrastructure capacity and resources for global expansion

Whatever decision eFunds and its Board decides could add greater value for its shareholders and stakeholders and with the recent surge in its share price, eFunds may benefit from rival bids of Fiserv and Fidelity and other suitors conducting their due diligence to determine if eFunds would be a good fit in their portfolio holdings and what price to pay for eFunds.