Nab In Hunt For $2bn Us Card Firm
Sydney Morning Herald
Tuesday July 1, 1997
National Australia Bank has emerged as the front-runner in a $2 billion, four-way bidding war for the US credit card company, Advanta Corp.
Bank sources said that NAB may be only "a matter of weeks" away from finalising the details of its bid for Advanta, which is the tenth 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 US bank heavyweights Chase-Chemical Bank, Bank America and First Chicago NBD in the takeover battle for the troubled Pennsylvania-listed company which has assets of $US14 billion ($18.6 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, market analysts said NAB had the ability to 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, as bad debts hampered 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 about 7 per cent of its asset base, which has resulted in the company reporting a first-quarter loss of $US20 million earlier this year.
Bad debt rates are typically below 4 per cent in the competitive US credit-card market, while NAB maintains a group-wide performance of below 1 per cent.
If it can improve Advanta's record by three percentage points, from 7 per cent to 3 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've moved the focus to non-bank financial institutions," one analyst said. "They'll be looking to leverage their processing expertise and use 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 about 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.
Advanta shares have been trading at $US36.75, down from a high of $US54.75 in February when the takeover speculation was at its height.
A US broker said Advanta was unlikely to sell for much above its current price.
NAB shares continued their recent bull run, closing 5c firmer and equal with the stock's all-time high of $19.02.
© 1997 Sydney Morning Herald
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