European Issuing M&A Update
The last half-decade has been a challenging time to be a European card issuer. The global financial crisis, the Euro crisis, economic uncertainty, and regulatory intervention (especially concerning interchange) have reduced issuers’ profitability and placed capital constraints on banks.
These factors should drive up issuing M&A activity but the market for European card issuing assets has stayed surprisingly consistent over the past few years. From 2006 to 2012, First Annapolis tracked about 17 deals each year that involved either a European buyer or European asset. There was a bump in 2007-2008, but otherwise deal flow has been steady even as the region fell into a protracted recession.
Several themes define European issuing M&A.
European issuing deals are local. Buyers and sellers often come from the same country. If they don’t come from the same country, they’ll come from neighboring or nearby countries. Only a third of deals since 2006 involved buyers and sellers from different regions. This makes some sense; Europe is not a homogenous market and buyers will best understand local targets and all of the associated risks and potential.
Not surprisingly, banks have been net sellers over the past few years. And it’s not a small margin; since 2006, there have been 1.5 times more banks selling than buying. Both American and European banks have aggressively sold off their issuing assets to raise capital. The number of assets sold by European banks spiked in 2008, whereas American banks have continued to sell off European assets through this year.
It isn’t private equity driving payments deals (although private equity has been active); most buyers are strategic players. Over three-quarters of the buyers in our database bought a competitor, affiliate, customer, or supplier. Only a small number of deals were won by private equity. It makes sense, then, that there are not a lot of serial buyers in European payments. Most deals are opportunistic, one-off events, not part of an ongoing strategy for a given buyer. There were only a few players who made serial acquisitions, and they were all strategic buyers. Accor of France bought five firms to build its loyalty and prepaid services business, which it then leveraged to create a joint venture with MasterCard. American Express bought four eclectic assets to strengthen its business in Germany and the Benelux. Barclays acquired five credit card portfolios from U.S. firms exiting the U.K. and other markets. Ikano Bank SE did a number of similar deals, buying up Citibank’s portfolios in the Nordics. And MasterCard strengthened its prepaid and value-added services offerings through two acquisitions and a joint venture with Accor.
Sales of carve-out credit card portfolios are less common. There were over three times as many going concern sales – i.e., operating card issuers and service providers like third-party processors – than pure card portfolio deals. When European banks decide to exit, they are typically selling the entire business unit. And a vast majority of portfolios sales were actually driven by one seller – Citibank, as it divested its Diners Club assets country-by-country.
Although our outlook for European card market growth is more positive for 2013 than it was for 2012, we expect issuing-related M&A activity to increase. Banks are likely to continue efforts to bolster capital through asset sales. Issuing portfolio sales, coupled with an ongoing agent bank relationship, are a logical option for European banks – especially those in markets hit hard by the economic downturn and continuing sovereign debt crisis.
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