Nab In Front On $2b Us Credit Card Bid
The Age
Tuesday July 1, 1997
National Australia Bank has emerged as the frontrunner in a $2 billion, four-way bidding war for the United States credit card company Advanta Corporation.
Bank sources said that NAB might be only "a matter of weeks" away from finalising the details of its bid for Advanta, which is the 10th biggest credit card issuer in the US.
It would be the bank's first major acquisition in three years, boosting NAB's total assets to almost $210 billion.
NAB is up against the US bank heavyweights Chase-Chemical Bank, BankAmerica and First Chicago NBD in the takeover battle for the troubled Pennsylvania-listed company, which has assets of $US14 billion ($A18.6 billion). The price tag is expected to top $US1.6 billion.
NAB has not made an acquisition since late 1994 when it launched a $2.1 billion bid for Michigan National Bank, which at the time was flagged by the bank's managing director, Mr Don Argus, as "a great platform" for a US expansion.
With the bank's profitability riding above $2 billion a year, analysts said NAB could make a major acquisition once every two years or so, but its expansion plans in the US have been thwarted by the high prices being paid for banks similar to Michigan National.
Advanta originates credit card and mortgages through direct marketing programs, focusing on heavy card users who revolve their credit facility but have a history of paying regularly and on time.
The strategy has come unstuck in the past year, with bad debts hampering profitability, but NAB believes its core skills of efficient processing and accurately assessing credit risk will allow it to nurse Advanta back to corporate health.
Advanta has been running charge-off (bad debt) rates at around 7 per cent of its asset base, which resulted in the company reporting a first-quarter loss of $20 million earlier this year.
Charge-off rates are typically below 4 per cent in the competitive US credit-card market, while NAB maintains a group-wide performance below 1 per cent.
If it can improve Advanta's record by three percentage points, from 7 per cent to 4 per cent, more than $US420 million pre-tax a year would be added to the business's profitability.
Analysts said yesterday that the Advanta acquisition dovetailed with NAB's latest change of strategy on acquisitions.
"They can't afford a US bank because they're too expensive, so now they have moved the focus to non-bank financial institutions," one analyst said. "They will be looking to leverage their processing expertise and utilise surplus capacity."
Advanta has shareholders' funds of $US952 million and a market capitalisation of $US1.59 billion, which includes a significant takeover premium, according to US stockbroking sources.
If NAB bids at around current levels, it would value the operation at 1.67 times net tangible assets for a business that typically returns more than 20 per cent on equity when operating efficiently.
© 1997 The Age
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