Financials on the rocks – FIG Market Update

The year 2015 has been marked by the acceleration of M&A activity in the financial sector, due to several distinct trends. Due to increased regulations, institutions must find new ways to not only adapt to the new expectations of regulators, but also to be proactive in finding sustainable business models. Higher capital requirements have put a damper on profitability and financial institutions are seeking new ways to achieve growth. Mergers and acquisitions have been a strategy, whereas some institutions have chosen to divest certain businesses and focus on their core products.

A continued improvement in the U.S. economy, as well as the unconventional monetary policies in the EU, have helped to boost economic activity, allowing for new opportunities to form in the financial services sector.

We cover some of these trends in the following M&A deals and listings: Evercore – Mizuho Bank, ICAP – Tullet, Poste Italane IPO, Visa Consolidation and the Wealth Management and private banking consolidation in the Swiss-Italian Market.

Evercore – Mizuho Bank

Evercore Partners Inc. announced on November 2nd the renewal of its mergers and acquisitions cross-border alliance with Mizuho Bank Ltd. for an additional three-year period. In conjunction with the extension of the strategic alliance, the Japanese institution will surrender $120m of senior notes acquired in 2008 – that will be replaced by a new loan – and it will exercise in full its warrant to purchase Evercore shares for $22 apiece. Of the 5.45 million shares issuable upon exercise of the warrant, 3.1 million shares will be offered to the public and 2.35 million shares will be repurchased by Evercore at the offering price. At current market prices of 55.89$, Mizuho will be selling Evercore stocks for more than $300m.

Mizuho entered in a strategic partnership with Evercore in August 2008, through an investment of $120m in 5.2% senior unsecured notes due in 2020 and equity warrants for 5.45 million shares exercisable at 22$ (71% premium over market price of 12.84$, as of August 20, 2008).

Together with the capital investment, the deal brought a wide strengthening of the previous partnership signed in 2006 for the securities business. In fact, the two firms agreed to work together on M&A deals between Japan and North America, a move that permitted Mizuho to expand its overseas presence in order to offset slackening growth in the domestic market and to capture advisory business as outbound acquisitions by Japanese companies continued to rise for the same macroeconomic reason. As of November 2015 Mizuho Securities and Evercore have successfully closed nine cross-border mandates involving Japanese and American clients.

As part of the agreement, the two firms committed also to cooperate in asset management. This element in particular was in line with Evercore’s strategy to boost its investment management franchise. In fact, the capital injected was meant to be invested mainly in enlarging Evercore’s presence in the investment management sector, and Mizuho itself committed to invest up to $150m in Evercore-managed funds.

ICAP – Tullett

After a long-standing history of rivalry, on November 6th Tullett Prebon announced the acquisition of ICAP’s global broking business. The deal follows a general trend of reorganizations driven by the structural changes affecting the industry since 2007. Costs have been inflated by strengthened banking and markets regulation (e.g. Volcker rule), IB customers have experienced shrinking and deleveraged balance sheets, and the uncertainty surrounding FED’s interest rate policy has boosted volatility in the market. Furthermore, the increasing presence of hedge funds and high-frequency traders has increased competition and eroded profits.

In order to overcome the lack of growth deriving from such an unpleasant environment, ICAP has favoured specialisation as its driving motive. In fact, the company already demonstrated its inclination towards electronic markets through its focus on assets such as BrokerTec. However, selling its global broking business to Tullett, ICAP will definitely confine itself to electronic trading and post-trade services, which currently represent its major sources of profit. A divergent strategy has been pursued by the bidder, whose intention is to focus on more specialised markets (e.g. oil) requiring phone brokerage. Moreover, in an effort to expand its data business, the bidder has also agreed to take over ICAP’s 40.23% stake in iSwap, an electronic trading platform for OTC interest rate derivatives, and ICAP’s information subsidiary. But why should ICAP want to dispose of an asset, the global broking business, on which it has been founded since the mid-1980s? In fact, it is the source of a £55m fine for attempted manipulation of the Libor lending rate in 2013, and it is still under investigation by US regulators for attempted manipulation of Isdafix reference rate.

In return for its assets, ICAP will receive a minority stake in the enlarged Tullett Prebon, which will issue more than 100% of its existing share capital in order to handle the due consideration. Under the terms of the deal, ICAP’s voice broking business would be valued nearly £780m, and costs synergies, mainly related to the combination of brokers, are estimated to be the most significant – around 30%.

The market has reacted positively to the announcement and the share prices of both companies raised so sharply that concerns about Tullett’s decreasing profits have been fully neutralised. Indeed, after BGC Partners’s acquisition of GFI Group and RP Martin (December 15th 2014), Tullett has suffered from declining market share and revenues. However, taking full control of ICAP’s voice broking business, it aims to rebuild its presence in the market, reaffirming itself as the “Goldman Sachs of the broking world”.

Evercore and JP Morgan Cazenove were joint financial advisors for ICAP, while Simmons and Simmons were the legal advisors. Rothschild was the sole financial advisor for Tullet.

Poste Italiane IPO

Poste Italiane IPO is the biggest privatization of the past 16 years in the Italian market. Through the sale of its 38% stake in the national Post service, the Italian Government raised nearly 3.4bn euros. The hope is to trim the 2,200bn euros public debt and to revive the planned privatization of State-owned enterprises. Poste Italiane IPO had been initially planned for earlier this year, but it has been pushed back after the disappointing performance of Fincantieri on Milan stock exchange last June. The next companies the Government plans to privatize are air traffic controller Enav and state railway group Ferrovie dello Stato.

Poste Italiane is regarded as a proxy for Italy itself, being it the country’s biggest employer with more than 140,000 employees and holding more than €100bn in domestic government bonds. “The deal has been a success, drawing requests of more than three times the amount on offer and attracting both big and small investors from around the world. It confirms investor confidence in the company and in the country” said Economy and Finance Minister Pier Carlo Padoan. The share price settled at €6.75 at the midpoint of the price range initially announced, between €6.00 and €7.50 per share. The IPO was covered more than four times by demand: around 461.1 million shares were distributed, 8.1 million of which (offered at the same price of €6.75) after the exercise of the greenshoe option. The business has been therefore valued at €8.8bn, with a 5% implied dividend yield.

Poste Italiane IPO has been conducted differently with respect to both UK’s Royal Mail IPO from two years ago and the recently executed Japan Post IPO. While Royal Mail has been listed only after the spin off of its banking and insurance division, Japan Post is more accurately described as a three-way IPO which will see the listing of Japan Post Holdings, Japan Post Bank and Japan Post Insurance. Poste Italiane did not do anything of the sort and went public as a block. Why does this strategically makes sense? Because what investors are interested in is not actually the postal service, but the insurance and banking divisions. Without the latter, the company would just be a loss-making giant: Poste Italiane hasn’t been quick at adapting to new trends in postage delivery. Although Italians historically prefer to talk on the phone rather than sending emails, therefore not impacting post delivery in an extreme way, the ever growing increase in parcel delivery hasn’t been exploited by Poste Italiane as it should have. The increasing penetration of e-commerce translates in an increase in parcel delivery which did not impact Poste Italiane as it should: the company has a market share of only 12%, compared to other national post offices’ 40-50%.

This loss making business is compensated by the insurance and banking services of Poste Italiane, which can benefit by its unrivalled presence on the Italian territory with more than 13,000 branches. The company is also planning to offer asset management services: the acquisition of Anima earlier this year is aimed at the purpose of offering higher yielding investments in a moment where Italian investors are starting to switch off from traditional Government bond investments.

Bank of America Merrill Lynch, Citigroup, Intesa Sanpaolo, Mediobanca and UniCredit were hired as global coordinators while Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley and UBS acted as bookrunners. The Treasury, which retained a 60% stake in Poste Italiane, was advised by Lazard. Poste Italiane itself has been advised by Rothschild.

Visa Inc. to acquire Visa Europe

After 2007´s split Visa Inc. is acquiring its former unit to create a global company. Before 2007 there were four major divisions of Visa: International, USA, Canada and Europe. In order to facilitate its IPO, it was decided that the first three entities would consolidate to create Visa Inc., and Visa Europe would remain as an independent membership association, with a minority shareholding in the new public company.

The possibility of a combination between the two companies has been rumoured for long; speculation became especially intense from May 2015 and a definitive agreement was reached on November 2015, when Visa Inc. announced the acquisition of its former unit.

The deal will be structured so that the world’s largest electronic payments company will pay €11.5bn in cash and €5bn worth of its own stock to Visa Europe’s owners. Moreover, a further $4.7bn would be paid if the European business meets undisclosed revenue targets for the following 16 quarters.

This deal will be financed through the issuance of senior unsecured debt for $16 billion in its fiscal first quarter of 2016, with maturities ranging between 2 and 30 years. The proceeds will fund the cash consideration and the repurchase of class A common stock outstanding in 2016 and 2017 to offset the effect of the issuance of preferred stock.

Visa Inc.’s had no significant debt before the deal and this transaction will allow it to establish a better long-term capital structure. The new leverage is expected to be around 1.5 times gross debt to EBITDA. Given the fact that Visa generates substantial cash flows every year (they expect to generate $7bn in FY2016), the company expects to maintain current investment credit ratings of A+ / A1.

The acquisition is believed to create value through increased scale (Visa Europe has 500m customers and is responsible for €1.7 trillion worth of payments, coming from 18 billion transactions a year in 38 countries), efficiencies realized by the integration of both businesses, and benefits related to Visa Europe’s transition from an association to a for-profit enterprise.

The company also believes that the combination will strengthen Visa´s payments system in Europe, as they will now have even greater financial resources to invest in technology assets. It must be noted however, that analysts have warned about the threat of MasterCard winning back some of the business that was previously tied with Visa Europe.

The transaction is expected to be dilutive for FY2016 in the low single-digit percentage point range. Benefits from revenue synergies, cost savings, and increased repurchases of class A common stock will begin to accrue in the low single-digit percentage point range in FY2017. Following the completion of integration, Visa Inc. expects the transaction to be accretive in the high single-digit percentage point range by FY2020.

The transaction is subject to regulatory approvals and is expected to close in Visa Inc.’s fiscal third quarter of 2016. JPMorgan Chase and Goldman Sachs advised Visa Inc. on the deal, while Wachtell, Lipton, Rosen & Katz, Macfarlanes and Milbank, Tweed, Hadley & McCloy served as legal advisers. Morgan Stanley and UBS advised Visa Europe and Linklaters provided legal counsel.

Wealth management and private banking consolidation with focus on Swiss-Italian market

Lately, Italy has been a very attractive place for international wealth managers due to its fragmented market, increase in level of savings and low interest rates. Naturally, this has led to a high number of deals as key players seek to consolidate their position.

Julius Baer – Kairos Investments

Julius Baer agreed with Kairos Investment to increase its stake in the company to 80% in an attempt to boost client inflows.

The 3rd largest wealth manager in Switzerland has increased its AUM with 6 billion francs or approximately 2% in the first 10 months of the year, mainly due to the acquisitions of Leumi Private bank and the Indian branch of Merrill Lynch but this is still far below its target of 4-6% growth.

Julius Baer has been impacted negatively by the appreciation of the Swiss franc, increased competition, conflict with US regulators and emerging markets environment. Therefore, the company has decided to take further actions such as acquiring Swiss asset manager Fransad Gestion and obtaining a controlling stake in the famous Italian wealth manager Kairos.

Kairos and Julius Baer lunched their cooperation in 2013 when Kairos sold a 19,9 % stake. Over the time this partnerships proved to be very beneficial, resulting in approximately 80% increase in AUM of Kairos Investment Management.

The terms of the transaction are undisclosed but the management team will remain in power.

Finally, the parties also agreed to list the company on Borsa Italiana in the near future.

UBS – Santander Italian private bank

UBS, the biggest Swiss bank, will acquire Santander Private Banking Italy, which manages close to 3 billion (2,7) euros of assets for its Italian clients through its 6 offices.

It is not surprising that UBS is acquiring the wealth management business in Italy of Santander as the company’s market share of 3,7% was unsatisfactory compared with its leading position globally and strategic focus on wealth management. Thanks to the acquisition, UBS will move from the 6th to 4th position on the Italian market.

BSI – Veneto Banca

Another Italian financial institution, Veneto Banca has been trying to sell its private banking arm – Banca Intermobiliare over the last weeks but without success. BSI (Banca della Svizzera Italiana) has been in exclusive talks with Banca Veneto over the last week but the parties didn’t reach an agreement, leaving the door open to other potential acquirers.

 

To contact the authors:

Giulia Ballabio                      giulia.ballabio@studbocconi.it

Adele Bertolino                     adele.bertolino@studbocconi.it

Giulio Giacomo Coperti         giulio.coperti@studbocconi.it

Alvaro Sanz Perez                alvarosanz366@gmail.com

Dimitar Stoyanov                  dimitar.stoyanov@studbocconi.it

To contact the editor responsible for this article:

Steven Suskauer                  steven.suskauer@studbocconi.it