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Financial institutions M&A: Sector trends - July 2020

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July 2020

We highlight the key European M&A trends in the first half of 2020, and provide our insights into the outlook for M&A moving forward.

Introduction

The COVID-19 pandemic has ravaged the European financial services sector, sending shockwaves across the FIG M&A landscape. It is no surprise that M&A volumes have plummeted. Yo-yoing valuations, buyer conservatism and the promise of "cheaper" stressed / distressed opportunities have compounded a cavernous rift between seller and buyer expectations. Reality is slowly sinking in—as the possibility of a v-shaped economic recovery becomes increasingly bleak, concern is growing around whether IFRS 9 loss estimation is much more than educated guesswork.

But all is not lost. The resilience of established financial institutions, fortified in the decade since the global financial crisis, agility afforded by digitalisation and evolution of customer interaction with financial services have contributed to M&A hotspots which burn bright amidst market gloom.

In this edition, we hone in on those hotspots and highlight the key M&A trends across Europe and the UK. Focusing on Banks, Fintech and Other Financial Services, we also provide our insights on the outlook for M&A in H2 2020 and beyond.

Key highlights from H2 2019 include the following:

  • Banks: Surge in strategic M&A, post-easing of lockdowns, as pent-up deal-making prowess is unleashed.
  • Fintech: Financial sponsors demand more bang for buck, as equity valuation volatility wreaks havoc for funding rounds.
  • Asset/Wealth Management: Differing bank prerogatives drives deal-making— some European banks tag-out from non-core business lines, while others tag-in for stable returns.
  • Payments: Lockdown utilisation levels encourage cross-border operators to scale-up and private equity investors to pile-in.
  • Stock Exchanges/Clearing Houses/Trading Venues: Clash of the pan-European titans—M&A plans signalled by LSE, Euronext and Deutsche Börse.
  • Brokers/Corporate Finance: Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.
  • Consumer Finance: A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.
  • Specialty Finance/Marketplace Lending: Panacea or plague—what will the true impact of accreditation for government-backed loan schemes be?

M&A Forecast legend

European financial services M&A trends

Europe's post-GFC leaner and better-capitalised banks are put to the test by the COVID-19 pandemic

Banks with stronger balance sheets capitalise on M&A opportunities amidst COVID-19 market turmoil, while their weaker peers consolidate to survive.

vault

As the technicolour gloss of unicorns fade, investors attempt to back the right horses

H1 2020 heralds an entirely new era for fintech, a market segment which scarcely existed at the time of the global financial crisis. Many founders and investors, who have enjoyed a bull run since 2015, have had their first taste of the bear markets which banks endured in the years following 2008.

Buckingham Palace gate details

Asset/Wealth Management

Differing bank prerogatives drive deal-making—-some European banks tag-out from non-core business lines, while others tag-in for stable returns.

stock market display

Payments

Lockdown utilisation levels encourage cross-border operators to scale-up and private equity investors to pile-in.

banknotes

Stock Exchanges/Clearing Houses/ Trading Venues

Clash of the pan-European titans—-M&A plans signalled by LSE, Euronext and Deutsche Börse.

bank

Brokers/Corporate Finance

Thinning of the herd continues as "traditional" brokers struggle to remain profitable amidst encroachment by Bulge Bracket and disruption by fintech.

stock display

Consumer Finance

A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.

credit cards

Specialty Finance/Marketplace Lending

Panacea or plague—-what will the true impact of accreditation for government-backed COVID-19 loan schemes be?

stock market display
credit cards

Consumer Finance

Financial Institutions M&A sector trends: Consumer finance — H1 2020 and outlook for H2 2020

Insight
|
6 min read

A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.

 

Overview

Current market

  • Flat

We are seeing

  • Trade consolidators bulk up—particular focus on payroll finance (e.g., Salary Finance's acquisition of Neyber and Greensill's acquisition of Earnd)
  • Disruptive residential lenders continue to attract capital (e.g., residential mortgage providers Verteva and Trussle all successfully raised funds in H1 2020)
  • Payday lenders exit stage-left (Peachy, Uploan and Privilege Wealth collapse into administration)

Key drivers/challenges

  • Trade consolidators:
    • Need new distributional channels (e.g., NewDay's acquisition of Dekko)
    • Integrate vertically (e.g., Max IT Finance's acquisition of CreditGuard)
    • Capitalise on stressed opportunities (e.g., Salary Finance's acquisition of Neyber)
  • Financial sponsors—opportunity to:
    • Conquer niche market segments (e.g., Anthemis's equity investment in gig economy lender Wollit)
    • Disrupt incumbents (e.g., EQT Ventures' equity investment in Anyfin)
  • Regulatory intervention:
    • Interest rate caps cripple mega-margin lending (e.g., Polish UOKiK's cap on non-interest costs of credit and interest charged for late payment on consumer loans)
    • Focus on affordability and debt spirals (e.g., UK FCA's 2021 focus on consumer harm and avoiding unaffordable debt)

Trends to watch

  • Market consolidation as consumer lenders suffer strain from:
    • Lower interest rates for longer in the wake of COVID-19
    • Government-backed COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures
  • Increasing focus of regulators on potentially harmful lending practices
  • POS / Buy Now Pay Later—strong online retail and temporary reduction in income reduction could mean well-positioned firms have not been dented by Covid19. Watch for strategic industry acquisition and global expansion

Our M&A forecast

Disruption across the European consumer finance market is likely to continue in the medium-term as the true impact of government-backed COVID-19 consumer relief measures becomes clearer. M&A is likely to remain flat until equity valuation volatility settles

 

Publicly reported deals & situations

Healthy buyer/ investor appetite

Market highlight:

ZipCo shares surged in June 2020 on its expansion into the US through QuadPay. ZipCo inherited an initial stake in QuadPay through its acquisition of PartPay. White & Case advised ZipCo on its acquisition of PartPay in 2019, a strategic transaction which gave ZipCo access to markets in the US, UK, New Zealand and South Africa

  • Santander: Acquisition of remaining 25% of Santander Consumer Finance (June 2020)
  • Lock Trust: Acquisition of Axxa Fintech Solutions (April 2020)
  • Salary Finance: Acquisition of Neyber (March 2020)
  • Greensill: Acquisition of Earnd (March 2020)
  • Ally Financial: Acquisition of CardWorks (February 2020)
  • Max IT Finance: Acquisition of CreditGuard (February 2020)
  • NewDay: Acquisition of Dekko (January 2020)

 

Smaller lenders stockpile lending firepower

  • LaterPay (Point-of-sale lending): US$10 million equity investment by existing investors (June 2020)
  • Checkout.com (Point-of-sale lending): Successful US$150 million Series B funding round, led by Coatue Management (June 2020)
  • Upgrade (Consumer credit): Successful US$40 million Series D funding round, led by Santander InnoVentures (June 2020)
  • Tillhub (Point-of-sale lending): Equity investment by Heidelpay (June 2020)
  • Tabby (Point-of-sale lending): Successful US$7 million Seed funding round, led by Raed Ventures (June 2020)
  • FlexxPay (Payroll finance): Equity investment from DIFC Fintech Fund (June 2020)
  • Go Rise (Migrant worker lending): Equity investment from DIFC Fintech Fund (June 2020)
  • NOW Money (Payroll finance): Equity investment from DIFC Fintech Fund (June 2020)
  • Shahry (Point-of-sale lending): Successful US$650,000 pre- Seed funding round, led by Egyptian Gulf Holding for Financial Investments (June 2020)
  • Anyfin (Consumer loan refinancing): Successful US$30 million Series B funding round, led by EQT Ventures (May 2020)
  • Verteva (Residential mortgages): Successful US$33 million funding round, led by Bolton Equities (May 2020)
  • Smava (Consumer credit): Successful €22 million Series E funding round, led by Vitruvian Partners (May 2020)
  • Wollit (Gig economy finance): Successful £1 million Seed funding round, led by Anthemis (February 2020)
  • Ramp (Credit cards): Successful US$25 million Venture funding round, led by Founders Fund (February 2020)
  • ChargeAfter (Point-of-sale lending): Equity investment by Visa (February 2020)
  • Trussle (Residential mortgages): Successful £7.5 million Series B funding round, led by Rabo Frontier Ventures (January 2020)

 

Demise of payday lending

Market highlight:

Poland's UOKiK introduced new regulations which cap the maximum noninterest costs of credit and interest charged for late payment on consumer loans

  • Peachy: Winding up (March 2020)
  • Uploan: Winding up (March 2020)
  • Privilege Wealth: Winding up (January 2020)

 

Partnership model

  • First Digital Bank: Debit card JV with Isracard (May 2020)
  • Max IT Finance: European and US payment clearing JV with Nuvei (February 2020)

 

Click here to download Financial services M&A experiences shortness of breath in H1 2020 (PDF)

 

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2020 White & Case LLP

 

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