U.S. Equity Company Warburg Pincus to Buy Israel’s Leumi Card for $680 Million

The fund will retain Leumi Card’s current management as it welcomes major foreign investors into the Israeli financial industry

File photo: A branch of Bank Leumi in Tel Aviv, May 30, 2013.
Nir Elias/Reuters

Bank Leumi and Azrieli Group agreed over the weekend to sell Leumi Card, Israel’s second-biggest issuer of credit cards, to the U.S. private equity firm Warburg Pincus for 2.5 billion shekels ($680 million) and quite possibly more later on.

The deal not only represented an unusually high valuation for Leumi Card, but marks the entrance of a major foreign investors into the Israeli financial services industry and the first major step forward in the government’s plan for inject more competition into Israeli banking.

Warburg was one of 17 Israeli and international financial groups that had expressed an interest in Leumi Card, including the Israeli-American media entrepreneur Haim Saban through his Israeli mobile company, Partner Communications.

In spite of the high valuation – 30% more than Leumi Card’s shareholders and equity and base sum equal to 13 years of future profits – the sales had been ordered by the government under the so-called Strum law that sets a 2021 deadline for Israel’s two biggest banks to divest their credit card units.

The government hopes that Leumi Card and the much bigger Isracard, which is controlled by Bank Hapoalim, will expand their operations and become competitors to the banks.

“The sale of Leumi Card is a major event for the Israeli economy and another step forward is increasing competition. I expect the Bank of Israel to encourage Leumi Card to become a big, thereby increasing competition,” said Finance Minister Moshe Kahlon, who had led the bank-competition agenda.

The Bank of Israel issued a statement praising the deal and said it hoped to approve it by the first quarter of next year. With assets of $45 billion and a portfolio of 165 companies around the world, Warburg Pincus should meet all regulatory requirements easily. It also has a great deal of experience in finance and its portfolio counts 19 banks and 24 insurance and payment companies.

“We don’t think there is reason [for any delays],” Hanan Friedman, head of Leumi’s strategy and regulation division, told Reuters. “This is about granting ‘permit to control’ to a group that has never gotten such permission in Israel.”

“But since (Warburg Pincus) has permission to control 19 financial groups in the OECD, including a permit they received two weeks ago in an EU country, we think the process should be relatively quick. So we believe it will be finished before the end of the year,” Friedman said.

Shares of Leumi, which owns 80% of Leumi Card, ended up 0.4% at 23.05 shekels on the Tel Aviv Stock Exchange on Sunday. Azrieli Group, a real estate company that owns the remainder, edged up just 0.06% to 197.10. The two are expected to take a 500 million dividend out of the business before the sale of Warburg Pincus is completed.

Israel’s Harel Insurance is lending Warburg Pincus 850 million shekels for the purchase.

In addition to the base price of 2.5 billion, the U.S. equity fund agreed to pay up to another 273 million shekels ion the six years after the sale is completed. Of that, between 50 million and 128 million hinges on milestone relating to an operational agreement the two sides reach and another 145 million if Leumi Card exceeds profit forecasts.

In addition, Warburg Pincus gave an option to the bank’s investment unit, Leumi Partners, to buy back 20% of Leumi Card at the same valuation of the done in the deal reached over the weekend.

The terms are designed to ensure Leumi retains an interest in its credit card unit continuing to thrive after its been spun off. Right now, the vast majority of Leumi Card holders are also Bank Leumi clients and the bank could have opted for a hard exit ending the special relationship. Instead, the sale agreement makes Leumi eligible for extra payments contingent on the credit card company succeeding.

Leumi, in fact,had already signaled its continued interest in Leumi Card. If could have opted to spin off the business via an initial public offering , but chose a buyers with what the bank’s CEO, Rakefet Russak-Aminoach, called a “reputable buyer with extensive experience in finance and payments.”

Daniel Zilberman, Warburg Pincus’ managing director and head of Europe, said the fund would be retaining Leumi Card’s current management, including CEO Ron Fainaro. “The Israeli payments, consumer finance and SME [small and medium-size enterprise] lending markets present considerable opportunity,” he said.

However, he faces a challenging business environment. Credit cards are a highly regulated business and Leumi Card lost a key partner with Super-Sol, Israel’s biggest supermarket chain, that opted last year

The rich valuation for Leumi Card, however, is unlikely to help Hapoalim in its sale of Isracard. The various investment funds looking into buying the company aren’t as likely to match Leumi Card’s valuation and, in any case, Hapoalim seems likely to spin it off via an IPO, meaning there would be no control premium on the valuation.

Hapoalim last month submitted a draft prospectus for a possible IPO that could come together with a stock dividend to its shareholders.

With reporting from Reuters.