Thursday, April 05, 2007

The threat of non-bank payment providers

One of the good things about the current spate of private equity interest in financial technology vendors is that it allows analysts and journalists, to indulge in some healthy speculation.

And that is just what Gareth Lodge, a European banking & payments analyst at TowerGroup has been doing since the announcement of private equity firm, Kohlberg Kravis Roberts & Co's (KKR) announcement of its $28 billion bid for payments processor, First Data.

KKR is no stranger to the world of buyouts having already secured in the region of $104.5 billion such deals so far this year. The US-headquartered payments processor is a desirable catch given that its strategy to grow outside its core US business by making acquisitions in Europe, the Middle East and Asia, has helped boost the fortunes of First Data International.

Lodge estimates that First Data has made at least 15 deals or alliances in Europe alone in the last 10 years, including its recent purchase of Polcard in Poland for $330 million.

An injection of private equity capital is likely to aid First Data's bid to become a truly global payment processor, enabling it to finance further acquisitions in the Middle East, Asia and Europe. And despite First Data spinning off money transfer provider Western Union, Lodge believes KKR's investment may also see the payments processor make a bigger play for the international remittances market, which is currently dominated by money transfer agencies and a handful of banks.

It will also 'deepen the pockets' of First Data, which Lodge believes is in a much stronger position financially than European payment processors such as Voca and Equens, to play an enlarged role in Europe post-SEPA.

"Voca is still paying for its core processing renewal ... and even though they had a capital call recently, it hasn't got the kind of funds First Data has, which spent at least half a billion over the last 18 months alone in Europe," says Lodge.

But for us speculators out there, what is even more interesting is the prospect that other bidders for First Data could enter the fray. Lodge says First Data has a clause which gives the company 50 days to find a better offer, which may seem unlikely given that KKR's $29 billion offer, is, according to Lodge, one of the largest private equity buyouts ever.

Yet, Lodge and other analysts at TowerGroup have been wracking their brains thinking of other potential bidders for First Data and the list they have come up with makes the mind boggle. Banks like Citi and RBS which have been linked to the Barclays' bid for ABN Amro cannot be ruled out. However, interest from non-banks like Microsoft, Google and supermarket chains, Tesco and Wal-Mart are also plausible, says Lodge.

Acquiring a payments processor with credit card processing capabilities and a global footprint would be a major boon for these companies, says Lodge. And whilst Tesco has worked with banks like RBS to deliver financial services in the UK, rumour has it that they do not plan on working with RBS outside of the UK. "Either they [Tesco] are trying to find a partner to work with in those regions or Tesco are going to go it alone," Lodge postures. "It [Tesco] is big enough to get a banking license, which would radically change the model."


ilanit said...

It seems odd that anybody would want to put money in
San Diego business investors. The fees are much higher than in the mutual fund or even hedge fund business. A private equity firm will charge a minimum of 3-4% on funds managed plus 20% on profits. There are also acquisition fees,disposal fees etc. An investor can get a piece of a company by paying less than 1% in brokerage. Mutual funds charge just a little more. If private equity attracts money despite high fees, it is because the returns they generate net of fees are still high.

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