Prospectus Summary
PROSPECTUS SUMMARY This summary highlights selected information included elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements and notes thereto included elsewhere in this prospectus. Because it is abbreviated, this summary is not complete and does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully before making an investment decision, including the information presented under the headings “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this prospectus. Unless the context otherwise requires, “Blackhawk Network Holdings, Inc.,” “Blackhawk,” “the Company,” “we,” “us” and “our” refer to Blackhawk Network Holdings, Inc. and its subsidiaries, and the terms “Safeway,” “Parent” and “Safeway Inc.” refer to our parent company, Safeway Inc., and its consolidated subsidiaries other than us.Business
Overview
Blackhawk is a leading prepaid payment network utilizing proprietary technology to offer a broad range of gift cards, other prepaid products and payment services in the United States and 18 other countries. We believe our extensive payment network provides significant benefits to our three primary constituents: consumers who purchase the products and services we offer, content providers who offer branded gift cards and other prepaid products that are redeemable for goods and services, and distribution partners who sell those products. For consumers, we provide convenience by offering a broad variety of quality brands and content at retail distribution locations and online, enhanced by customer promotions and loyalty incentive programs that may be offered by our distribution partners. For our content providers, we drive incremental sales by providing access to millions of consumers and creating new customer relationships. For our distribution partners, we provide a significant, high-growth and highly productive product category that drives incremental store traffic and customer loyalty. Our technology platform allows us to efficiently and seamlessly connect our network participants and offer new products and services as payment technology evolves. We believe the breadth of our distribution network and product content, combined with our consumer reach and technology platform, create powerful network effects that enhance value for our constituents and fuel growth in our business.
We are one of the largest third-party distributors of gift cards in the world based on the total value of funds loaded on the cards we distribute, which we refer to as load value. Our extensive network connects to more than 500 content providers and over 100,000 active retail distribution locations, providing access to over 160 million consumer visits per week. In addition, we sell physical and electronic gift cards to consumers through both leading online distributors and our website, GiftCardMall.com. In fiscal year 2012, we processed a total load value of $8.5 billion and over 216 million load transactions.
We offer gift cards from leading consumer brands such as Amazon.com, Applebee’s, iTunes, Lowe’s, Macy’s and Starbucks and from payment networks such as American Express, MasterCard and Visa. We also distribute prepaid telecom products offered by leading prepaid wireless telecom brands. In addition, we distribute general purpose reloadable, or GPR, cards provided by Green Dot and NetSpend, the industry leaders in this product category, as well as PayPower, our own GPR card. REloadit, our proprietary reload network, allows consumers to reload funds onto certain of their previously purchased GPR cards. Our content provider relationships allow us to provide what we believe is the most extensive selection of gift card brands and prepaid products in a single shopping location for consumers seeking to purchase prepaid products both as gifts and for their own use. In 2012, our gift card products represented approximately 84% of total revenues.
We distribute our products across multiple high-traffic channels such as grocery, convenience, specialty and online retailers. Grocery is our largest channel and enjoys a high volume of frequent visits from all consumer demographics. Our distribution network includes nine of the top ten, and approximately 90% of the aggregate grocery store locations operated by the top 50, conventional grocery retailers in the United States and Canada as reported by Supermarket News on January 30, 2012. These grocery retailers include Ahold, Giant Eagle, Kroger, Loblaws, Publix and Safeway. We also distribute our products in specialty retailers such as Bed Bath & Beyond, Lowe’s and Staples, in convenience stores such as QuikTrip and Wawa, and in other retailers such as JCPenney and Kohl’s. In addition to the United States, we distribute our products in 18 other countries, including Canada, the United Kingdom and Australia. We are expanding in Brazil and Korea and we also plan to begin selling in China in 2013. Our international business accounted for approximately 15% of our total revenues in 2012. Because of the wide array of quality content we offer and the high-growth, highly productive characteristics of our product category, we have been able to develop strong relationships with our distribution partners, generally with multi-year contracts containing varying degrees of exclusivity.
We have invested over $100 million in our proprietary technology platform which connects content providers, distribution partners and transaction processors, and allows consumers to easily load, reload, redeem and manage prepaid cards. We believe our technology capabilities provide us with significant competitive advantages and cannot be easily replicated.
We have experienced significant growth since our inception in 2001 as we expanded our network. From 2008 through 2012, our revenues grew from $362 million to $959 million and our Adjusted net income grew from $22.7 million to $50.3 million, representing a compound annual growth rate, or CAGR, of 27.6% and 22.1%, respectively.
Industry Overview
As paper-based forms of payment have declined over the last several decades, card-based and other electronic forms of payment have increased significantly, with the development of different types of payment products and services to address specific consumer needs. Gift cards and other prepaid products represent a large and quickly growing segment within the continuing shift toward electronic payments. Prepaid products accounted for an estimated $483 billion of load value in the United States in 2011 and are expected to grow at a projected 12% CAGR from 2011 to 2015 according to Mercator Advisory Group’s “U.S. Prepaid Cards Market Forecasts, 2012-2015” research report.
Consumers increasingly view gift cards as convenient self-use products that often provide many advantages over traditional cash, debit and credit payment methods. This trend towards self-use is redefining the scope of the addressable market in the gift card category.
Digital products and mobile payments are also emerging as the “next generation” in prepaid technology, facilitating convenience and accessibility for consumers. Many merchants now offer prepaid products that can be purchased online and then delivered electronically either to the purchaser or to a gift recipient through email or social media. Mobile digital wallet applications are also being offered to provide consumers greater convenience and flexibility by using their mobile phone as a payment device at the point of sale. Mobile payment transactions are expected to grow to $617 billion in 2016 from $172 billion in 2012, according to Gartner’s “Forecast: Mobile Payment, Worldwide, 2009- 2016” research report. As mobile digital wallets continue to gain more widespread adoption, consumers will demand integrated solutions for management of their prepaid products. Platforms that can provide digital market participants with critical prepaid functionality and connectivity between consumers, retailers and payments networks will be best positioned to share in the rapid growth of this opportunity for mobile digital wallets.
Our Competitive Strengths
Leading Distribution. We have developed a network of over 100,000 active retail distribution locations across multiple channels, providing us with frequent access to a large number of consumers. Our diversified distribution capabilities include grocery stores, convenience stores and specialty and online retailers. The combination of our broad consumer reach, investments in retail store displays and our customized value-add services, such as merchandising, marketing programs and direct-to-store fulfillment, results in a highly productive third-party prepaid distribution program.
Breadth of Product and Service Offerings. We believe that our payment network offers consumers the most extensive assortment of gift cards and other prepaid products and payment services available in a single shopping location. We currently offer multiple categories of prepaid products and services, including gift cards, prepaid telecom cards and handsets, and GPR cards and reload services, with access to over 500 consumer brands, retailers and other merchants. The breadth of product categories and depth of our offerings in each category diversify our revenue streams and position us to benefit from shifting consumer trends.
Innovation. We have a history of innovation, driven by our strong commitment to consumer research and new product testing. We pioneered the distribution of gift cards through third-party retail channels. We launched GiftCardMall.com, a third-party online site for the sale of prepaid products. We have also developed innovative capabilities and services to integrate prepaid products with mobile applications. Our open platform can support a broad range of retailers, financial institutions, social networks and digital wallets. We also operate in the secondary gift card market through Cardpool, a gift card exchange that enables consumers to sell unused gift cards at a discount for cash and purchase gift cards at a discount. We believe that our broad-based industry knowledge in combination with our dedication to consumer research and our proprietary technology platform will allow us to continue to innovate and enhance the value of our network for all participants.
Proprietary and Scalable Technology. We have a vertically integrated infrastructure, which includes our proprietary switching and redemption, processing, settlement and e-commerce systems. We believe that owning and operating our own technology platform provides us with economic and time-to-market advantages when introducing new products, features and network participants. Our systems are designed to be highly scalable and reliable, which enables us to respond to rising demand while ensuring high-quality service for our network participants.
Strong Network Effects. The combination of our broad range of products and leading consumer brands, our extensive footprint of high-traffic distribution partners and our frequent access to a large consumer base creates strong, self-reinforcing network effects. We believe the growth in our product offerings, our distribution partners and our consumer base enhance the value we deliver to all network participants. We believe our network would be difficult to replicate and allows us to drive innovation, create new prepaid products and services and adapt to evolving payment technologies.
Experienced Management Team. Our senior management team has extensive experience across a wide range of disciplines relevant to the payments industry, including technology, distribution, retail program management and financial services.
Our Growth Strategy
Increase Productivity of Our Distribution Partners. We believe there is a significant opportunity to enhance the productivity of our distribution partners, which will lead to greater sales at existing retail locations and drive incremental revenue for our business. We have developed best practices based on our distribution partners’ performance over time and we utilize these best practices to help our distribution partners measure and increase their productivity. Several of these best practices include development of expanded retail displays, use of our marketing programs and direct-to-store fulfillment solutions, and the inclusion of prepaid card purchases in our distribution partners’ loyalty and rewards programs.
Expand Our Content, Products and Services. We believe we have the opportunity to increase our revenues by expanding the breadth of our content as well as the types of products and services that we offer.
Continue to Develop International Markets. We continue to expand our business in countries with strong growth potential and the appropriate payment and retail infrastructure to support prepaid products. For example, we have replicated the U.S. model in Canada, where we offer prepaid products through leading grocery and convenience stores. We also have international operations in Australia, the United Kingdom and other countries in the European Union, where we have contracted with leading distribution partners. We are expanding in a number of countries including Brazil and Korea and we also plan to begin selling in China in 2013.
Expand Our U.S. Distribution. We believe there is opportunity to expand our distribution to new retail partners in the United States. The strength of our network, the variety of our offered brands and the breadth of our products have made our displays a destination for consumers. In addition, we believe our products and services have created a highly profitable product category for many of our existing distribution partners, which presents a compelling value proposition for other potential distribution partners.
Leverage Our Technology and Distribution Infrastructure to Drive Cost Efficiency. We believe that we have the opportunity to lower our costs through scale efficiencies, improved systems, cost discipline and continued process improvements. For example, as the overall scale of our operations has grown over the past three years, our processing and services expense has declined as a percentage of total revenues. We will continue to use established business processes to identify and execute initiatives to increase back-end integration and leverage infrastructure to increase the efficiency of our core prepaid card business.
Our Relationship with Safeway
We are currently approximately 96% owned by Safeway, and Safeway will continue to hold shares of Class B common stock representing a significant majority of the combined voting power of our outstanding common stock upon completion of this offering. Safeway is also one of our largest distribution partners. Please see “Certain Relationships and Related Party Transactions” and “Principal and Selling Stockholders.”
Risk Factors
Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully under the caption “Risk Factors,” and include risks under the headings “Risks Related to Our Business and Industry,” “Risks Related to Our Ongoing Relationship with Safeway” and “Risks Related to this Offering and Ownership of Our Class A Common Stock.”
Corporate Information
We were founded in 2001 as a division of Safeway. We were incorporated in Delaware as Blackhawk Network, Inc. in 2006 and changed our name to Blackhawk Network Holdings, Inc. later that year. Our principal executive offices are located at 6220 Stoneridge Mall Road, Pleasanton, California 94588, and our telephone number at that location is (925) 226-9990. Our website is www.blackhawknetwork.com. The information available on or that can be accessed through our website is not incorporated by reference into and is not a part of this prospectus and should not be considered to be part of this prospectus.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerging growth company” shall have the meaning associated with such term in the JOBS Act.
The Offering
The number of shares of Class A and Class B common stock to be outstanding after this offering is based on 102,548,074 shares of common stock outstanding as of January 31, 2013 and excludes:
Conventions that Apply to this Prospectus
Except as otherwise indicated, all information in this prospectus assumes:
When the selling stockholders consummate sales of Class B common stock in this offering, the shares of Class B common stock sold will automatically convert into shares of Class A common stock on a share-for-share basis. As a result, purchasers of our common stock in this offering will only receive Class A common stock, and only Class A common stock is being offered by this prospectus. Shares of Class B common stock that are not sold by the selling stockholders will remain Class B common stock unless otherwise converted into shares of Class A common stock as described under “Description of Capital Stock.”
Summary Consolidated Financial Data
The following tables present a summary of our consolidated financial data and other operational and financial data for the periods ended on or as of the dates indicated. You should read this information together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. This summary of our consolidated financial data is not intended to replace the financial statements and is qualified in its entirety by the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.
We use a 52- or 53-week fiscal year ending on the Saturday closest to December 31, and our fiscal quarters consist of three 12-week periods and one 16- or 17-week period. The fiscal years presented in the tables below consist of the 53-week period ended January 3, 2009, or 2008, and the 52-week periods ended January 2, 2010, or 2009, January 1, 2011, or 2010, December 31, 2011, or 2011, and December 29, 2012, or 2012. As used in this prospectus, italicized terms reference line items appearing in our consolidated financial statements.
We derived the statement of operations data for 2010, 2011 and 2012 and the balance sheet data for 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the statement of operations data for 2008 and 2009 and the balance sheet data for 2008, 2009 and 2010 from our audited consolidated financial statements (which we adjusted for the impact of redeemable equity) not included in this prospectus.
The following table presents consolidated balance sheet data as of year-end 2008, 2009, 2010, 2011 and 2012 on an actual basis and as of year-end 2012 on an as adjusted basis to give effect to the reclassification of outstanding shares of our common stock, the termination of all redemption rights held by equity holders and the reclassification of Warrant and common stock liabilities and Redeemable equity as Stockholders’ equity. In addition, upon completion of this offering, we will be required to record an expense with respect to the equity instruments held by certain distribution partners in an amount equal to the excess of the initial public offering price per share multiplied by the relevant number of equity securities over the amount previously expensed, with an offsetting increase in Stockholders’ equity. The amount of this non-cash expense is estimated to be $ million in the aggregate (assuming the midpoint of the estimated offering price range set forth on the cover of this prospectus).
please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Equity Instruments Issued to Distribution Partners.”