Financial institutions M&A: Sector trends - January 2019
What's inside
January 2019
We highlight the key European M&A trends in the second half of 2018, and provide our insights into the outlook for M&A in 2019
Introduction
As 29 March 2019 draws closer, and the possibility of a ’no deal’ Brexit becomes ever more real, many financial services businesses across Europe are contending with operational uncertainty of monumental proportions. The same businesses are also shouldering the growing strain of market fragmentation, digital transformation, disruptive financial regulation, large-scale IT meltdowns and cybersecurity attacks.
Notwithstanding these pressures, many financial institutions have hardened their resolve that ‘the show must go on’.
Against this backdrop, we analyse M&A activity across 5 main financial services subsectors: Banks, Fintech, Asset/Wealth management, Market infrastructure and Consumer finance. In this report, we highlight the key trends across Europe and the UK in 2018, and provide our insights into the outlook for M&A in 2019 and beyond.
European financial services
M&A trends
Regional and domestic consolidation tops the agenda
2018 has been a transformational year for fintech M&A. Deal values and volumes have reached new heights as established financial institutions pin hopes on well‑placed bets to deliver competitive edge and market share. VC and late‑stage investment firms are also actively stoking the fintech fire.
Payment services M&A retains its spark on the financial services landscape. Stock exchanges poise for strategically significant deals. And, brokers resort to M&A to combat the impact of disruptive regulation.
Specialty finance is now viewed as a mainstream source of credit by SMEs, which has encouraged the rapid growth of lending platforms and success of direct-lending funds across Europe. Specialty finance will thrive as credit assessment criteria continue to hamper established banks.
Ashley Ballard Partner, London EMEA M&A Group
Consumer finance:* Credit cards/Consumer credit
Deal activity involving credit card businesses blooms—trade consolidators, financial sponsors and big banks see opportunities
Buyers scrutinise historic compliance weaknesses/strengths as well as potential impact of any upcoming regulatory changes before taking the plunge
Current market
Upward, marginal
We are seeing
Trade consolidator and late-stage PE-led M&A
Key drivers
Healthy buyer appetite from:
Trade consolidators—seeking scale and product range
Financial sponsors—disrupting sleepy incumbents and turning a profit
Big banks—international exposure and access to new cross-selling opportunities
Sellers feeling the pressure:
To offload “riskier” consumer credit offerings
From regulators for increased market competition
Rise of white-labelling models
Trends to watch
Competition from new fintech entrants, keen to expand into banking products and services (e.g., Klarna, Marqeta, etc.)
Increasing risks associated with card businesses:
Heightened regulator intervention in M&A (e.g., UK CMA’s Phase 2 review of PayPal’s acquisition of iZettle)
Heightened regulator intervention in operational matters (e.g., European Commission’s probe into interchange fees charged on tourists’ card payments)
Heightened government social prerogatives (e.g., proposal for stricter mandatory credit assessment rules for consumer credit in Norway)
Heightened litigation risk—retailers clubbing together to stop abusive dominant behaviour (e.g., Visa’s and MasterCard’s ongoing legal battle relating to unlawful swipe fee levels)
Our M&A forecast
Lucrative M&A opportunities exist. However, competition is stiff for assets where governments/regulators are seeking to instil market competition by encouraging sellers to offload businesses. Buyers need to carefully assess existing compliance strengths and weaknesses of targets as well as the potential impact on profitability of any upcoming regulatory changes.
Consumer finance: Payday lenders
The sun continues to sets on deal activity involving payday lenders, as the UK FCA’s interest rate caps crush profit margins
As one door closes, another opens—providers of alternative credit options step up to fill the void left by payday lenders crushed by the UK FCA’s interest rate caps
Current market
Decline
We are seeing
Dwindling financial support
Key drivers
Deal-making has slowed as financial sponsors focus capital on more lucrative areas within the European financial services landscape
Increased operating and regulatory pressures—the UK FCA continues to heap pressure on the remaining market players to atone for perceived harm to vulnerable consumers
Trends to watch
New entrants stepping up to service the market segment left vacant by exiting payday lenders:
Dynamic loans—interest rates decline in proportion to credit score increases (e.g., Chetwood Financial’s Livelend product)
Short-term loan options by regulated deposit-taking institutions (e.g., Monzo)
Micro-lending—smaller amounts to be repaid over several months (e.g., Oakam)
Decline of predatory businesses practices and unjustifiably high interest rates
High levels of regulatory oversight:
Possible expansion of the UK regulatory perimeter (e.g., introduction of price-capping across more high-cost credit products)
Active policing of customer complaints handling and mis-selling compensation payment plans
Our M&A forecast
The UK FCA has crippled mega-margin lending across the country. However, market players with safer, consumer- centric business practices may rally to avoid certain consumers being locked out of credit markets or pushed into other forms of high-cost loans.
Consumer finance: Specialty finance/ Market place lending
The sun rises on M&A in the specialty finance space—support from established banks, financial sponsors, trade consolidators and local governments turbocharges deal-making
Technology-led market metamorphosis continues at pace
Current market
Upward, significant
We are seeing
Shaken, not stirred—cocktail of established banks, financial sponsors and trade consolidators actively involved in M&A
Key drivers
Expanding universe of potential investors:
Established banks—embracing the digital revolution, including through deployment of multi- boutique structures
VC and late-stage PE—opportunity to capture an under-serviced markets
Trade consolidators—conquering their own niches
Governments—credit availability for SMEs
Successful IPOs, despite challenging capital market conditions
Growth capital for market players—successful capital raisings have provided funding for organic expansion by smaller players and M&A firepower for first-movers
Growth of new lenders, encouraged by government support for alternative finance for SMEs (e.g., Spanish Law for Promotion of Entrepreneurial Financing)
Trends to watch
Market at an inflection point:
First movers (including Amigo and Funding Circle) have enjoyed successful IPOs. Listed platforms will have access to capital necessary to turbocharge expansion plans
Traditional asset managers seeking to utilise peer-2-peer platforms for large-scale capital deployment (e.g., Waterfall AM’s funding of £1 billion of SME loans through Funding Circle)
Governments ensuring debt funding for SMEs through peer-2-peer platforms (e.g., British Business Bank’s £150 million SME funding commitment through Funding Circle)
Consolidation of Europe-focused direct-lending funds
Our M&A forecast
High levels of M&A activity as established banks, financial sponsors and trade consolidators vie for market share amidst growing market demand. If “no-deal” Brexit replays the credit crunch, specialty finance will become an increasingly important source of working and growth financing for SMEs.
White & Case advised one of the bidders for Israel’s largest credit card business, Leumi Card, ultimately acquired by Warburg Pincus.
Deal highlight
White & Case advised SIA, a European leader in the payments infrastructure space, on its €375 million acquisition of First Data Slovakia and First Data Hellas Processing Services
Trade consolidators:
La Banque Postale: Acquisition of 35% of La Banque Postale Financement (December 2018)
Agos Ducato: Acquisition of Profamily (December 2018)
BGL: Acquisition of Saverd (October 2018)
SIA: Acquisition of First Data Corp’s CEE card processing businesses (October 2018)
Zmarta Group: Takeover offer for Insplanet (September 2018)
Strategic investors:
Bankinter: Acquisition of AvantCard (September 2018)
Warburg Pincus: Acquisition of Leumi Card (July 2018)*
New fintech entrants
Chetwood Financial: Liveland dynamic load JV with Clearscore (November 2018)
Marqeta: Payment cards and processing JV with Visa (October 2018)
Klarna: Launch of payment card (July 2018)
Increasing operational risks
Litigation risk:
Future Finance: Payment of €2 million compensation to customers for UK Consumer Credit Act breaches (July 2018)
Visa and MasterCard UK Court of Appeal’s landmark judgment in favour of a group of British retailers relating to unlawful swipe fee levels (July 2018)
Regulator intervention:
PayPal-iZettle: Phase 2 review of PayPal’s acquisition of iZettle by UK CMA (December 2018)
Visa and Mastercard: Offer of cap on interchange fees charged on tourists’ card payments in response to European Commission probe (December 2018)
Wider market influence—new regulatory burdens
Norwegian Financial Services Authority: Proposal for stricter mandatory credit assessment rules for offer of consumer loans and credit cards in Norway (September 2018)
UK Payment Systems Regulator: Launch of wide-ranging investigation into limited competition within the UK’s card industry, with a focus on card-acquiring services (July 2018)
Zopa: Successful £60 million funding round (led by Augmentum, Northzone and Bessemer) and £44 million funding round (led by Wadhawan Global Capital) (August – November 2018)
Divido: Successful US$15 million Series A funding round, led by Dawn Capital and DN Capital (September 2018)
LendInvest: Successful US$40 million funding round, led by Atomico and GP Bullhound (September 2018)
KKR: Dutch and German SME lending JV with NEOS and Schroders (August 2018)
Ares: Raise of €6.5 billion European direct lending fund (July 2018)
Governments:
UK British Business Bank: £150 million of funding for Funding Circle (November 2018)
Management:
Crowdhouse: Partial MBO (December 2018)
FI:
Liberbank: Spanish business participation JV with October (December 2018)
BAWAG: Acquisition of BFL Leasing (December 2018)
Bank of New Mellon: Investment of £300 million into ThinCats (September 2018)
Poštová banka: Acquisition of Amico Finance (August 2018)
Trade consolidators:
abcfinance: Acquisition of G.R. Factoring (December 2018)
EC Financial Services: Acquisition of JET Money (September 2018)
City of London Group: Acquisition of Acorn to Oaks (July 2018)
White Oaks: Acquisition of LDF (July 2018)
Paragon Banking Group: Acquisition of Titlestone Property Finance (July 2018)
Vertical integration
Waterfall Asset Management: SME loan funding JV with Funding Circle (December 2018)
Anaxago: Launch of Anaxago Capital (September 2018)
Market inflexion point
Deal highlight
White & Case advised Amigo Holding PLC, the leading company in the UK guarantor loan space, on its £1.3 billion IPO on the London Stock Exchange
IPOs:
Fellow Finance: Nasdaq First North IPO at €55 million valuation (October 2018)
Funding Circle: LSE Main Market IPO at £1.504 billion valuation (September 2018)
Amigo: LSE Main IPO at £1.504 market valuation (June 2018)
Expanding horizons:
Zopa: Successful grant for UK banking licence (December 2018)
Regulators roll up their sleeves
ECB: Proposal for stricter scrutiny of investment funds and other firms across the EU’s shadow-banking industry (September 2018)