Warburg Pincus buying Leumi Card at NIS 2.5b valuation

Moshe Kahlon  photo: Moshe Milner, GPO

Minister of Finance Moshe Kahlon: This is a giant step towards breaking the monopoly of the banks.

For the first time, an Israeli credit card company will be owned by a foreign investor: private equity firm Warburg Pincus is buying control of credit card company Leumi Card. Details of the deal were agreed at the weekend with Bank Leumi (TASE: LUMI), with Azrieli Group Ltd. (TASE: AZRG), which holds 20% of Leumi Card, joining the deal as well. Warburg Pincus is buying Leumi Card at a valuation of NIS 2.5 billion, and will pay up to NIS 273 million six years after the signing of the deal if Leumi Card achieves better results than those in the business model presented to the buyer. The purchase price is payable in three installments: the first on the transaction's completion date, the second one year after the completion date, and the third two years after the completion date.

The purchase price is 30% higher than Leumi Card's shareholders' equity, and Bank Leumi will record a capital gain of NIS 234 million.

Minister of Finance Moshe Kahlon said, "This is a giant step towards competition and breaking of the monopoly of the banks. All along, we were determined to introduce a player who would generate competition in the industry, and we have succeeded in doing so contrary to all the forecasts and assessments. A strong, new, fresh source of credit is an appropriate competitive answer to such a concentrated market. Such competition will be beneficial to small businesses suffering from a severe credit squeeze and to consumers, who will find companies competing for their business. A expect the Bank of Israel to award the fund a banking license within exactly three months as agreed, should the fund want one of course."

Although the Bank of Israel did undertake to award a banking license in an expedited process for credit card companies split off from Israel's banks, it is believed unlikely that Warburg Pincus will want to turn Leumi Card into a bank, because of the lower profitability of traditional banking activity. So although the separation of Leumi Card from Bank Leumi will create a new financial player, it is not expected to result n a new bank.

Leumi CEO, Rakefet Russak-Aminoach said, "I am pleased with the excellent results of a responsible and professional process we have led over the past few months. Due to the importance of Leumi Card and its services to customers, we endeavored to find a reputable buyer with extensive experience in finance and payments, who will be committed to the development and success of Leumi Card in its new independent path. Warburg Pincus's experience will assist Leumi Card in realizing its business strategy and ensure innovative, high-quality and professional service to its customers. This is a great vote of confidence in the Israeli economy by one of the world's largest private equity funds, and is a source of great pride to us all."

The sale of Leumi Card is in accordance with the Law for Increasing Competition and Reducing Concentration in Israel's Banking Market, which requires the bank to sell its stake in the subsidiary (Leumi Card).

Warburg Pincus has approximately $45 billion in assets under management, and its portfolio includes more than 165 companies. Of the assets invested by the firm, about $11 billion has been invested in various financial entities, of which 19 are banks and 24 are insurance companies and financial institutions, including regulated companies in the payments industry.

Daniel Zilberman, managing director and head of Europe, Warburg Pincus, commented, "We are excited to partner with Leumi Card in the next phase of the company's growth. The Israeli payments, consumer finance and SME lending markets present considerable opportunity, and we look forward to working closely with chief executive officer Ron Fainaro and his talented management team. I'd like to thank Bank Leumi for a well-run and professional process, and to personally thank the Bank's President and CEO, Ms Rakefet Russak Aminoach, for her support and backing of this new and exciting partnership."

Leumi Partners, Bank Leumi's investment arm, will receive an option to buy up to 20% of the corporation through which the Warburg Pincus will buy Leumi Card, subject to regulatory approval. It is possible then that Warburg Pincus will in fact hold 80% of the shares, and that Bank Leumi will retain a connection with Leumi Card.

Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) will finance part of the purchase price for Warburg Pincus, and before the deal is completed Leumi Card will pay a dividend totaling some NIS 500 million to Bank Leumi and Azrieli Group.

The price in the deal is a fine achievement for Bank Leumi. At first, the price spoken of for Leumi Card was around NIS 3 billion, but then estimates fell to around the company's shareholders' equity of about NIS 2 billion because of substantial regulatory changes in the industry and the loss of Leumi Card partnership with supermarket chain Shufersal Ltd. (TASE:SAE) in the latter's customer loyalty club to CAL Israel Credit Cards Ltd. In the end, however, a deal was put together reflecting a valuation much higher than Leumi Card's shareholders' equity.

Warburg Pincus representatives have met with Israel's Supervisor of Banks and no obstacles are expected to the award of a license to Leumi Card's new controlling shareholders.

Warburg Picus's rivals for the acquisition of Leumi Card were US private equity firm Centerbridge Partners, represented in Israel by former Mizrahi Tefahot Bank (TASE:MZTF) CEO Eli Yones, and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) href=Javascript:viewInstrument('PTNR',11,'EN')>PTNR; TASE: PTNR). Warburg Pincus's main advantage was its in-depth knowledge of Leumi Card, as it has been interested in buying it for two years. It is therefore very familiar with the company and the market, enabling it to make a generous offer with confidence.

Leumi Card has about 25% of the Israeli credit card market, and is the largest player in non-bank credit among the credit card companies.

One challenge the deal will face is in labor relations. Leumi Card's workers committee declared a labor dispute ten days ago because of the wide gap between it and management over a new collective labor agreement. The workers committee has threatened that unless a new agreement is signed before the sale, it will make greater demands of the new owners, and will introduce work sanctions.

Isracard, the credit card company controlled by Bank Hapoalim (TASE: POLI), is also in the process of being sold. Advent International and Bain Capital Private Equity have expressed interest in a deal, as has Israeli private equity fund Sky. The assessment on the capital market, however, is that there is a good chance that Bank Hapoalim will opt for a flotation of Isracard on the stock market and a distribution of some of its shares as a dividend in kind, instead of selling control. It is possible that the deal for the sale of Leumi Card will mean that the separation of Isracard from Bank Hapoalim will proceed more quickly.

Published by Globes [online], Israel business news - www.globes-online.com - on July 29, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Moshe Kahlon  photo: Moshe Milner, GPO
Moshe Kahlon photo: Moshe Milner, GPO
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