Itaú to buy out Redecard

Itaú-Unibanco plans to spend almost $7bn to buy out credit card processing company Redecard, as Brazil’s biggest private sector lender fights for control of one of the most lucrative sectors of the country’s banking industry.
 
Redecard and its rivals have posted some of the biggest gains on Brazil’s stock exchange recently as the surging middle class increases demand among retailers for card processing services.

The São Paulo-based bank said on Tuesday it planned to buy the 49.99 per cent of Redecard it did not already own, offering R$11.77bn ($6.84bn) to take the company private.
 
In the past 12 months, Redecard’s shares have risen 60 per cent, while the sector’s biggest company, Cielo, has soared about 80 per cent.
 
However, competition has become fierce after Redecard and Cielo lost exclusivity agreements with MasterCard and Visa respectively in July 2010. Although the two groups still hold more than 80 per cent of the $400bn-a-year industry, new competitors have started to enter the market, such as Elavon from the US, following the end of the so-called duopoly.
 
“After the market opened, new opportunities became available for lots of different companies as commercial establishments could just choose whatever machine they wanted,” said Luis Miguel Santacreu, an analyst at Austin Asis, a banking sector consultancy.
 
According to a securities filing on Tuesday, Itaú will offer R$35 for each of the 336.39m Redecard shares currently trading on São Paulo’s stock exchange.
 
The offer, which represented about a 9 per cent premium to Redecard’s closing price on Monday, caused the card processor’s shares to surge almost 10 per cent on Tuesday and notch up their biggest daily gain since October 2009.
 
Provided the offer was approved by shareholders, Itaú said it planned to delist Redecard after acquiring the company’s outstanding shares.
 
Aside from giving Itaú greater access to Brazil’s growing consumer class, the credit card processing sector was attractive because of its relative low costs and high returns, said Mr Santacreu.
 
“The operational cost of credit cards is much lower than that of cheques, and banks can make money both from the commercial establishment where the machine is and also from the high rates the customers have to pay,” he said.
 
“Also many Brazilians who don’t have current accounts at banks, have credit cards. It’s their first introduction to the banking system, so we are seeing an explosion in the number of credit cards being emitted.”
 
According to Abecs, Brazil’s credit card and services association, more than half of purchases of groceries, petrol, and clothes in Brazil last year were made using electronic payment methods.
 
However, when it came to leisure spending, 71 per cent of purchases were made using traditional methods such as cash.

(Samantha Pearson | ft.com)