Bank Hapoalim (TASE: POLI) is taking steps to further its options ahead of its looming separation from credit card company Isracard. Sources inform "Globes" that the bank, managed by president and CEO Arik Pinto, is conducting a round of talks with key investment institutions in the market for a possible IPO by the company. At the same time, this is not a roadshow for marketing Isracard and discussing the company's value; the talks are more general and involve an in-depth explanation about the credit card sector in Israel and the likely dramatic changes in it.
Bank Hapoalim decided to hold the talks because there is currently no listed credit card company and investment institutions not sufficiently familiar with the credit sector and the changes expected in it. For example, there will be an explanation of relations between the credit card issuer and the card operator, an issue emerging as important after the bank (the issuer) is separated from the credit card company (the operator). This measure is designed to help the bank prepare the spadework if it does decide to hold an IPO.
Although this measure constitutes a preliminary measure for an IPO by Isracard, it is by no means sure that Bank Hapoalim will go through with an IPO. Sources also inform "Globes" that investment funds Advent and Bain Capital, the main parties interested in the acquisition of Isracard, will upgrade their offer to acquire the company. It is believed that the funds are willing to acquire Isracard at a value in the area of NIS 3.5 billion, 10% higher than the company's shareholders' equity. At the same time, this bid is subject to certain conditions, including the relationship and operating agreement to be reached between Isracard and Bank Hapoalim, currently the main distributor for the former's credit cards.
Distribution as a dividend in king
Another option on the agenda is distribution of Isracard as a dividend in kind to Bank Hapoalim's shareholders, headed by the Arison group, which holds 20% of the bank's shares. If this option is chosen, it will probably be combined with an IPO in order to make the shares liquid.
The option of a dividend in kind is unattractive to the bank itself; it is good only for its shareholders, because the bank will post no profit from a dividend in kind and will suffer a reduction in capital (in a sales or IPO at a value higher than the shareholders' equity, on the other hand, the bank will post a profit). The main advantage of such a measure is that it can be carried out quickly and does not depend on a buyer.
Although the bank currently has a good offer on which it will make profit, the dividend in kind option is still on the table and is viewed as a real possibility. Bank Hapoalim has not yet decided what plan to select and is following up all three options simultaneously.
Isracard is Israel's largest credit card company, accounting for about half of the credit card market with an annual usage turnover amounting to NIS 150 billion. The company, managed by CEO Ron Weksler, is in the midst of a challenging period. The interim period before separation from Bank Hapoalim is creating potential for a conflict of interest and causing recurring tension between the company and the bank (as is also happening at Bank Leumi (TASE: LUMI) and Leumi Card). The reason is that after being separated from the banks, the credit card companies are supposed to compete with the banks in the lending sector. The banks, on the other hand, are trying to compensate themselves for the expected loss of revenue resulting from separation by developing their own activity in competition with the credit card companies, such as their payment applications activity.
Another important issue remaining open is the relations between the bank and Isracard after separation. This matter is to be clarified in the operating agreement between the parties, which has not yet been signed. This agreement is to settle the distribution of revenue between the parties and other issues pertaining to joint activity, such as the access to the bank's customers that the credit card company will receive.
In the course of an IPO or distribution in kind of Isracard, Bank Hapoalim will have more control in determining the future relationship. On the other hand, under a scenario of selling Isracard to a controlling shareholder (especially a strong controlling shareholder like the funds that have made an offer), the negotiations will be more difficult; the buyers will want to verify that Isracard will not be in a weak position vis-à-vis the banks following separation.
Bank Leumi has already separated
Separation of Isracard from Bank Hapoalim is required under the Increasing Competition in Banking Law, which requires the large banks to sell the credit card companies they own by 202. It appears, however, that the banks are in a hurry to complete the separation before the date stipulated in the law.
While Bank Hapoalim is still working hard on the separation process, Bank Leumi signed an deal to sell Leumi Card a month ago. The company was sold to the Warburg Pincus investment fund for the handsome sum of NIS 2.5 billion, 30% more than the company's shareholders' equity.
The agreement is constructed so that the connection between the bank and the credit card company will be preserved and the bank will have an interest in the credit card company's success. For example, the bank will benefit from an additional payment of over NIS 200 million if it meets certain targets relating to Leumi Card's credit card activity. Similarly, the operating agreement between the parties was signed for a 10-year period, thereby ensuring stability and certainty about the expected distribution of revenue between them.
Warburg Pincus is also currently in talks with Israeli institutions in an effort to interest them in acquiring 20% of Leumi Card. The Bank of Israel refused to allow Bank Leumi to retain shares in Leumi Card. Israeli investment institutions are now entering the credit card business ahead of a possible investment in two companies in the sector.
Published by Globes [online], Israel business news - www.globes-online.com - on August 28, 2018
© Copyright of Globes Publisher Itonut (1983) Ltd. 2018