Blackhawk IPO and the Value of Prepaid Distribution

Navigator Edition: September 2012
By: John Grund

Safeway’s decision to IPO a minority stake of Blackhawk Network is yet another milestone in the evolution of the prepaid industry given its unique distribution role in the broader value chain.  Green Dot and NetSpend serve as bell weathers for the market value of program managers in the prepaid value chain, but the importance of distribution is evident in their respective business models.  However, the two largest distribution players – Incomm and Blackhawk – are privately/closely held (although Warburg Pincus recently made a minority investment in Incomm) and among the most interesting companies in prepaid.  It is important to note that both Incomm and Blackhawk are more than pure play distribution entities given the technology, products/services, and platforms resident in each company.  That being said, both enjoy highly advantaged positions in the prepaid value chain given the dynamics of distribution and as an affiliate of Safeway, Blackhawk is particularly unique in that regard.

Any IPO (or investment in the case of Incomm/Warburg Pincus) is fundamentally a story about future growth which begs the question on the direction of third party distribution.  Will consumers adopt mobile in a way that shifts card acquisition from physical distribution in any meaningful way?  Will Blackhawk and Incomm be major players in the mobile wallet space and be able to transfer their strengths in physical distribution to the digital space? Can physical distribution be leveraged in ways beyond prepaid to open up entirely new growth vectors?  Is the runway for international growth robust? Will entirely new third party distribution models emerge with the likes of Facebook, Groupon, Amazon, etc.? Can a retailer-led initiative such as MCX (Merchant Customer Exchange) eventually be a platform for gift card distribution?  Will some combination of forces drive distribution margins down over time?  The market will be the ultimate judge, but to date, distribution-based business models have been resilient and impressive.   According to management, Blackhawk generated $62 million in pre-tax income for 2011, a 64% increase over the previous year, and even stronger metrics are anticipated for this year.

Safeway’s decision to take Blackhawk public is a classic case of unlocking value given the P/E differential between a grocer and a high growth, high margin company with low capital intensity.  Blackhawk has an enviable market share with over 72,000 distribution locations and drove just under $7 billion in load value in 2011.   Blackhawk has a commanding share of grocery distribution and, ironically, has successfully established relationships with direct competitors of Safeway.  The reach of its distribution network and share of the grocery channel allowed Blackhawk to secure certain relationships on an exclusive basis at attractive margins.  Over the course of time, the cost of and debate over third party distribution is always high on retailer agendas given their thin margins and different views on incremental sales but to many it is a cost of doing business unless and until the market changes.

While overall market conditions have improved for IPOs in general, Green Dot’s recent earnings miss and lowered guidance have given pause to investors that have been riding the wave of prepaid.  That said, Blackhawk has a unique model with large-scale distribution, access to millions of customers a day in foot traffic, a self-managed line of open-loop prepaid products, and distribution arrangements with market leaders across verticals.  In our view, distribution remains the most defensible link in the prepaid value chain as even the best products cannot overcome weak distribution.

Figure 1: Blackhawk at a Glance
Source: Goldman Sachs 2012 Global Retailing Conference, company websites and press releases, and Safeway 2011 Annual Report.

For more information, please contact John Grund, Partner specializing in Credit Card Issuing,

To read the rest of this article, please subscribe to

The Navigator Newsletter