There is no doubt that Bank Leumi (TASE: LUMI) can congratulate itself for selling its credit card company, Leumi Card, to the Warburg Pincus investment fund. The NIS 2.5 billion price in the deal reflects a value for Leumi Card 30% higher than the company's shareholders' equity, although Bank Leumi was negotiating under difficult conditions of dramatic change in regulations affecting the credit card companies that threatens their profitability, the loss of the Leumi Card's large and successful club of Shufersal Ltd. (TASE:SAE) customers, and the simultaneous putting up for sale of the Isracard credit company. Despite all of these factors, 17 companies and funds expressed interest in acquiring Leumi Card, which was eventually sold to a large and strong investment fund at a handsome price.
How did Leumi Card do it? With all due respect to the various regulatory threats, the main future risk to Leumi Card is its relations with Bank Leumi. The vast majority of Leumi Card customers are customers of Bank Leumi, which is the main distribution channel for the company's cards. The big question was what would happen after the sale - whether Bank Leumi would stop selling the company's cards and would start selling cards giving it more revenue, how it would divide revenue with Leumi Card, and what the already rather tense relations between the two players would be like following the sale.
From the particulars of the agreement, it appears that Warburg Pincus has solved this problem. The agreement guarantees continued cooperation between Warburg Pincus and Bank Leumi, so Warburg Pincus felt comfortable in paying a price substantially in excess of Leumi Card's equity, reflecting the company's expectation that it would reach the ambitious targets set after its separation from Bank Leumi.
The operating agreement between Bank Leumi and Leumi Card arranges future relations between the two concerns, including the distribution of revenue between them. The agreement is not transparent and does not disclose all of its particulars. At the same time, two items from the deal published today hint at expected continuation of the connection between Bank Leumi and Leumi Card.
First of all, Warburg Pincus undertook in the framework of the agreement to pay Bank Leumi NIS 273 million more if Leumi Card meets the targets set, which probably concern the volume of Leumi Card's activity with Bank Leumi's customers; this is designed to give Bank Leumi an incentive to market the cards. Another even more important clause, however, states that Leumi Partners, Bank Leumi's investment arm, has an option to buy 20% of Leumi Card at this value of this deal. Leumi Partners will exercise this option if it receives regulatory approval for it, something that cannot be taken for granted, given the attitude reflected by the Increasing Competition in Banking Law (the Strum Law), which sought to put distance between the large banks and the credit card companies.
This option, if exercised, will continue to tie Bank Leumi to Leumi Card, meaning that Bank Leumi will still have an incentive make Leumi Card successful, since as the owner of 20% of Leumi Card, it will benefit from such success.
The remaining connection between Bank Leumi and Leumi Card has an advantage - it removes the main risk to Leumi Card. On the other hand, it raises the question of to what degree Leumi Card will be willing to compete with Bank Leumi by making attractive offers to its customers when Bank Leumi is still its main distribution arm and becomes a strategic partner and a shareholder in it after the separation.
Published by Globes [online], Israel business news - www.globes-online.com - on July 29, 2018
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