MasterCard Buys Travelex's Prepaid - Analyst Blog

Expanding its global prepaid business, yesterday MasterCard Inc. (MA) announced the acquisition of UK-based largest non-bank foreign exchange supplier and cross-border service provider, Travelex's prepaid Card Program Management (CPM) division for an all-cash deal of £290 million (US$458 million). Additional earn-out of up to £35 million (US$55 million) has also been agreed upon meeting certain performance targets. The deal is expected to close by the first half of 2011.

The CPM segment of Travelex handles and delivers consumer and corporate pre-paid travel cards or card passports, which works as an electronic substitute to travellers' cheques. These travel cards also allow consumers to hold in good foreign exchange rates when they buy them, thereby securing them from the adversities of currency fluctuations. Travelex provides this facility to a broad range of partners, including financial institutions and foreign exchange retailers.

Under the terms of the acquisition, MasterCard will now operate on Travelex's card passports through a long-term contract, while the CPM division will continue providing its management services to Travelex as well. However, MasterCard has refrained itself presently from directly issuing such cards.

Further, the transaction is expected to be dilutive to MasterCard's earnings per share by 4 cents in 2011, neutral in 2012 and accretive from 2013 onwards. The dilution in 2011 is based on certain one-time integration charges. Travelex, however, expects the proceeds to be utilized for boosting its operational efficiencies and eliminating debt.

After the acquisition of the British online payment service company, DataCash, in October this year, MasterCard's latest Travelex business acquisition reflects the company's international expansion strategy.

Through this growth strategy the company also appears to follow the prime peer Visa Inc.'s (V) growth approach, which has also been expanding its operations globally through the recent and major CyberSource acquisition and alliances with eBay Inc.'s (EBAY) PayPal payment services, among others.

MasterCard's latest Travelex acquisition is also an attempt to tap growth opportunities in the rapidly growing charge-card market. Particularly, the higher processing fees and promotion of higher-charged cards by the card giants have cost ample to the merchants, consumers and to the government.

As a result, financial reforms have been laid for consumer protection that discourages such expensive cards.  Hence, the prepaid card segment has come into foreplay since they carry cheaper processing fees and limited credit, thereby avoiding exorbitant loans.

Moreover, a recent study by the Boston Consultancy Group revealed that prepaid card transactions are expected to grow to more than $840 billion by 2017. Currently, this is estimated to be around $37 billion in 2010. Hence, a timely entry in this market will help boost MasterCard's revenue, which also seeks to tap the expanding prospects arising from the shift to electronic cards from cash and cheques.

On the other hand, Travelex's decision behind the sale includes its strategy to direct its efficiencies to e-commerce channel and to explore other fast-growing emerging markets. Hence, we believe the Travelex's CPM acquisition is a perfect fit in MasterCard's product basket that will enhance its revenue and earnings synergies in the long term.

MasterCard is the world's second-largest credit and debit card payment processing network, just behind Visa. It benefits from strong secular demand growth, meaningful international exposure, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium.

However, we are concerned about MasterCard's resilience and ability to raise prices, the detrimental effects of the recent financial reform Act and scope for increasing cash flow. Hence, the cautious outlook over the near term justifies our Neutral recommendation.

 
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