American Express Deal a Consumer Buffer and Network Gain

American Express Co.'s deal to buy GE Money's corporate payment services unit for $1.1 billion would give it a portfolio largely untouched by the consumer credit crisis and a market-share gain against MasterCard Inc.

For GE Money, the Stamford, Conn., consumer finance arm of General Electric Co., the deal is the first — and perhaps the easiest — part of a process begun last year: selling some or all of its card businesses, of which corporate payments services is a small and relatively low-risk part.

The corporate payments services unit, which issues travel-and-entertainment purchasing cards for 300 companies, generated more than $14 billion of transactions last year and had $1.1 billion of receivables at yearend. By comparison, Amex's corporate business had transaction volume of $122 billion last year; GE Money's private-label consumer card business has assets of about $30 billion.

The deal was announced Thursday and is expected to close this month. Amex said it plans to spend "several months" courting the unit's customers, whose consent Amex needs to convert their cards from the MasterCard network. So far it has landed the unit's largest customer: General Electric itself.

MasterCard said it would be compensated for business lost under a "transition agreement" it has with GE Money. The Purchase, N.Y., company also said it would "aggressively pursue and seek to retain" the GE Money corporate customers, by offering "MasterCard-branded corporate payment solutions through other MasterCard customer financial institutions."

Amex, though generally regarded as having affluent, creditworthy cardholders, was hit by a sudden deterioration in consumer credit and spending trends in December. The New York company issued a fourth-quarter profit warning and has lowered its 2008 earnings growth projections.

Anre Williams, the president of Amex's global commercial card and services business, said in a press release that GE Money's corporate payment services unit has generated "impressive growth."

"Expanding our corporate purchasing and expense management services is a top priority for American Express," Mr. Williams said. "Acquiring Corporate Payment Services adds to our purchasing card capabilities and gives us the opportunity to accelerate our growth."

Mark Begor, the president and chief executive of GE Money-Americas, said in the release that the sale of the corporate payments unit "meets GE's strategy of redeploying assets in financial services."

In December, General Electric's chief executive, Jeffrey Immelt, said there was "a big base cost restructuring that could take place" in GE Money's credit card business. "And it's our sense that it's a good time to explore whether partnering with somebody … or the ability to do some kind of a portfolio acquisition might make sense."

Robert J. Rendine, a GE Money spokesman, said it considered the corporate payment services unit distinct from the rest of the card business and would not have included it in any sale of that portfolio. GE Money is at the "front end" of that process, which it expects to complete sometime in the second half, he said.

Gail Wasserman, a spokeswoman for Amex, said it plans to offer jobs to all 350 employees of the GE Money corporate payment services unit.

Bruce Cundiff, a research analyst at Javelin Strategy and Research in Pleasanton, Calif., said he was a little surprised by the price Amex agreed to pay, which was equal to the face value of the receivables, given the current market environment.

However, he said, "it kind of speaks to the risk level of the corporate business versus the consumer business. I would be more surprised if this were a $1 billion-plus portfolio with all of the associated risks" of a consumer credit card operation.

Scott Strumello, an associate at Auriemma Consulting Group Inc., said GE Money probably had a much easier time finding a buyer for the relatively low-risk corporate payments business than for larger portfolios that would be more affected by the consumer credit crisis.

"A smaller piece is usually easier to sell than the whole," he said. "The issue with GE Money is just that it's so big, there are only a handful of players in the world that really could afford it."

Mr. Cundiff said the sale would "definitely" have a "two-pronged impact" on MasterCard. "There's the PR portion of it — 'Hey, here's a source of revenue that we're potentially losing' — and then the actual revenue hit."

Sanjay Sakhrani, an analyst who follows MasterCard and Amex for KBW Inc.'s Keefe, Bruyette & Woods Inc., said the impact on MasterCard would be "a loss but not a material" blow.

"It's $14 billion in the context of" more than $2 trillion of annual transaction volume, he said. And "some part of the business that they could tap into directly" could remain if MasterCard persuades some clients to switch issuers.

Philip J. Philliou, a partner at the New York payments consulting firm Philliou Selwanes Partners LLC, said MasterCard could well succeed in that effort.

"American Express shouldn't underestimate MasterCard's ability to go after this business, and I'm sure they'll do so quite aggressively with their issuers," said Mr. Philliou, a former executive at MasterCard and Amex. "They've got more than a fighting chance to retain large pieces of this business."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER