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April 4, 2008

GE deals signify new business strategy

GE Money has been at the centre of two recent major deals within the cards and consumer finance space, indicating a realignment of business interests and future areas of expansion for all involved. Truong Mellor reports on the implications. GE Money, the consumer finance arm of US-based conglomerate General Electric (GE) has agreed to sell Corporate Payment Services (CPS), its commercial card and corporate purchasing business unit, to American Express for $1.1 billion in cash. The sale also includes the purchase of GEs patented and renowned vPayment technology, which provides fast and efficient payment for large ticket purchases. This platform allows for fraud control over the processing of large transactions with the provision of unique account numbers for each transaction that expire once the sale is authorised. CPS was formed in 1992 to issue GEs corporate travel and entertainment cards and purchasing cards to employees of the company. Since then, it has expanded to serve over 300 large corporate clients. The company is largely based in Salt Lake City, and has approximately 350 employees. GE continues to be the units largest single client, and has signed a multi-year agreement to become a client of American Express. The corporate payments arm of GE Money has generated over $14 billion of global purchase volume in 2007, and maintained $1.1 billion in receivables at year-end 2007. Its billed business has grown at a compounded rate of 18 percent over the last five years. The services offered by the unit are comparable to those provided by American Expresss commercial card business, which handles the travel, entertainment and purchasing spending by employees of mid-sized companies to large corporations. Accounts are typically paid in full at the end of each month, rather than through a revolving credit account.

By Verdict Staff

GE Money has been at the centre of two recent major deals within the cards and consumer finance space, indicating a realignment of business interests and future areas of expansion for all involved. Truong Mellor reports on the implications.
GE Money, the consumer finance arm of US-based conglomerate General Electric (GE) has agreed to sell Corporate Payment Services (CPS), its commercial card and corporate purchasing business unit, to American Express for $1.1 billion in cash. The sale also includes the purchase of GE’s patented and renowned vPayment technology, which provides fast and efficient payment for large ticket purchases. This platform allows for fraud control over the processing of large transactions with the provision of unique account numbers for each transaction that expire once the sale is authorised.
CPS was formed in 1992 to issue GE’s corporate travel and entertainment cards and purchasing cards to employees of the company. Since then, it has expanded to serve over 300 large corporate clients. The company is largely based in Salt Lake City, and has approximately 350 employees. GE continues to be the unit’s largest single client, and has signed a multi-year agreement to become a client of American Express.
The corporate payments arm of GE Money has generated over $14 billion of global purchase volume in 2007, and maintained $1.1 billion in receivables at year-end 2007. Its billed business has grown at a compounded rate of 18 percent over the last five years. The services offered by the unit are comparable to those provided by American Express’s commercial card business, which handles the travel, entertainment and purchasing spending by employees of mid-sized companies to large corporations. Accounts are typically paid in full at the end of each month, rather than through a revolving credit account.

Deal strengthens Amex

The acquisition will strengthen the presence of American Express in the commercial cards and T&E sectors, which have traditionally been the core business of the company. It is only over the last decade that it has diversified its business into the wider retail market, and according to Francesco Burelli, cards and payments specialist at management consultancy AT Kearney, the deal with GE Money may be an indication of a new direction for American Express.

“Given the recent write-offs within its retail portfolio, the increased risk profile of cardholders and the diminishing net yields of retail card portfolios making a number of issuers focus on their most profitable commercial card business, I would not be surprised if American Express would not take steps in the same direction, given its position of leadership in the T&E and corporate cards business,” Burelli told CI.
The acquisition of CPS gives Amex over 300 large corporate customers, and Burelli believes that this is the most crucial part of the deal for the company. “The vPayment technology is another asset that cannot be undervalued, given its unique features and the value that such a system brings in view of raising levels of online fraud prevention, but my opinion is that the underlying driver for the acquisition is the portfolio of corporate customers and not the vPayment technology,” he adds. “CPS services are similar to those offered by the commercial cards business of Amex and the acquisition provides Amex with a valuable growth opportunity.”
This deal with GE Money follows the recent sale of Amex’s international banking subsidiary in order to pursue this strategy. In February, the company sold its international banking subsidiary, American Express Bank (AEB), to Standard Chartered for a purchase price of approximately $823 million. The two companies have also entered into a put and call arrangement, whereby American Express can sell and Standard Chartered can buy American Express International Deposit Company (AEIDC) 18 months from the time of the sale.
“I believe that AEB was proving to be more of a distraction to Amex than anything else,” says Burelli. “AEB has been rumoured to be up for sale for quite some time on the basis of its limited role within the wider American Express group.”
According to the card network, the deal will immediately add to revenue, but diminish earnings slightly in the first few years after completion. The anticipation for a small drop in earnings is based on the expectation that the funds used to buy the Corporate Payment Services unit would have otherwise been used to repurchase American Express common shares. As part of the transaction, American Express will also replace the approximately $1 billion debt that supports the receivables of the Corporate Payment Services business.
“Expanding our corporate purchasing and expense management services is a top priority for American Express,” said Anré Williams, President of American Express’s Global Commercial Card & Services. “Acquiring Corporate Payment Services adds to our purchasing card capabilities and gives us the opportunity to accelerate our growth. In addition, Corporate Payment Services also has excellent credit metrics and a premium client base.”
Sanjay Sakhrani, an equity analyst at Keefe, Bruyette & Woods, told CI: “The cards currently operate on competitor networks (it appears mainly MasterCard) and will be transitioned over to Amex. Relative to our assumptions, we estimate that this business would be accretive to Amex’s worldwide billed business volume growth by about 150-200 basis points, assuming all of the customers convert to Amex cards at the time of the closing. However, it is likely that volume (and accounts) will be phased in over the course of the year, making the contribution somewhat less muted than our estimates in 2008.”
Given the position and the scale of Amex in the corporate and T&E sector, Burelli is interested to see whether Amex will start playing a more active role in the wider corporate payments space. “I would not be expecting Amex to start playing in the real-time gross settlement systems space. Given its position in commercial cards, there could be a potential complementary extension into the payments flows associated with corporate value chain integration as well as e-billing and procurement services, either as an extension of the functionality provided by commercial cards or by exploring opportunities within the automated clearing house (ACH) space,” he explains.
Finding a stable source of revenue is becoming increasingly important as the US economy slows down, and with commercial card payments being perhaps the only bright spot on the horizon, Amex’s acquisition of CPS could help to buffer it against weaker earnings in its consumer operations (see figure 2)
A recently released US government report established that the economy grew at an annual rate of 0.6 percent in the fourth quarter of 2007, while Amex announced that consumer spending slowed down in December last year, a trend it says it expects to continue in 2008. The company reported a 6 percent decline in fourth quarter 2007 earnings from continuing operations after taking a $438 million charge for deteriorating credit in its US cards operations. In anticipation of further credit losses this year, Amex has announced that it is building reserves to offset this.
The purchase agreement between Amex and GE Money is not the first time the two companies have joined forces. In August 2007, they both entered into a partnership that saw GE Money issue American Express-branded credit cards in Japan. But what this deal may signify is the effects of the subprime meltdown and resulting credit crisis on American Express, a company that had until recently been considered impervious to the worsening credit conditions as it has a book primarily focused on affluent customers. Announcing its fourth quarter 2007 results in late January, American Express reported a 10 percent drop in net income to $831 million or $0.71 per share, lower than $922 million or $0.75 per share at the same time during the previous year.

Provisions for losses and benefits – American Express

GE Money and Santander

GE Money has also recently reached an agreement with Spanish banking giant Santander, whereby GE Money will take control of Santander’s Italian commercial banking unit, Interbanca, which was acquired as part of the ABN AMRO purchase by the Royal Bank of Scotland/Santander/Fortis consortium in 2007. However, the agreement also means that Santander will acquire GE’s businesses in Germany, Finland and Austria as well as its cards and auto financing operations in the UK. The Spanish bank will look to combine these businesses with its existing consumer finance and cards divisions.

“We believe this agreement is in the best interest of GE Money, our individual businesses and GE’s shareholders, and allows us to optimise our own portfolio for continued growth in investment, while meeting GE’s strategic objective of redeploying assets in financial services,” said William Cary, CEO of GE Money.
This shift away from consumer finance for GE Money comes after its parent company, GE, envisaged thorny consumer market conditions in 2008, particularly in the US, and said it would reconsider elements of its GE Money business. Jeffrey Immelt, CEO of GE, had already conceded that the group was looking to “partner or exit” in private-label cards, which make up part of the operations it is selling in the UK.
As part of this restructuring in the wake of the subprime crisis, GE is also currently looking into shedding some of its consumer finance interests in Canada, including its near-prime alternative mortgage lending business. While Toronto-Dominion Bank is rumoured to be one of the institutions interested, both companies are remaining tight-lipped for the time being.
However, although the company is divesting its interests in sluggish credit card markets such as the UK and the US, GE Money is looking to increasingly focus on developing markets such as India and Poland. The deal with Santander allows the company to redeploy its assets in these emerging areas. In 2007, approximately 75 percent of GE Money’s sales and more than 65 percent of its profit came from markets outside the US.
For Santander, the deal will expand the bank’s existing consumer finance businesses by around 20 percent and is expected to generate synergies of €140 million ($219.2 million) over three years. Its consumer finance business contributed 24 percent of the group’s €7.8 billion net operating income in 2007, an increase of 55 percent.
Santander still retains a stake in the Italian market with a small consumer finance business as well as through its private banking operations. It also has non-strategic financial stakes in Italian banks of less than 2 percent, which includes UniCredit and Banca Monte dei Paschi di Siena.
The bank already has operations in Germany, the UK and Austria, where it can generate clear cost savings through this deal with GE Money. The swap also means the bank gains access to the lucrative Finnish market. Santander will acquire 136 branches, 100 of which are in Germany and other 36 in Austria. It will also take over contracts that GE Money has with auto finance dealers in all of the markets. A large part of the GE Capital portfolio, around 70 percent of the lending, is focused on auto finance, making it a good fit for Santander’s existing product mix. The bank will also take on GE Money’s affinity cards business in the UK, which will have clear cost synergies for the bank and complement its existing consumer finance business.

Spend velocity* by business, 2007

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