Buying Citigroup Inc.'s merchant acquiring unit is not likely to boost First Data Corp.'s domestic volume much but could provide entree to two big foreign markets.
Citi Merchant Services had only 14,000 clients last year and volume of $9.6 billion - less than 1% of the domestic merchant processing market. In fact, Citi decided to sell the unit mainly because it "was not of the scale that we had hoped it would become," said Anita Gupta, a Citi spokeswoman.
But Robert J. Dodd, an analyst for Morgan Keegan & Co., noted that Citibank Germany has about 19% market share, and that Citigroup's Banamex subsidiary in Mexico is a top acquirer there.
"Though both the German and Mexican acquiring markets are currently small, we believe there is significant room for long-term growth," Mr. Dodd wrote in a research note.
And Rodney D. Bell, a spokesman for First Data, said that though the deal announced Tuesday involves only U.S. business, there is potential to eventually work with Citi's foreign operations as well.
"Our focus is on the domestic business at this point," he said, but First Data is expanding its own merchant processing business abroad, and "that gives us capabilities to bring back to the table" when talking to an alliance partner that has international business.
First Data, of Denver, did not disclose what it would pay for Citi Merchant Services. In his research note, Mr. Dodd estimated the price at $150 million to $200 million. Citi Merchant Services has annual net revenue of about $60 million to $70 million, and transaction processors typically command revenue multiples of 2.5 to 3 when sold, he said.
Under the agreement, First Data will own and run the unit; Citi will provide marketing support. Ms. Gupta said that the unit's name will not change - that having the Citi brand could help win customers.
First Data already participates in merchant processing partnerships with several other major banking companies, including JPMorgan Chase & Co., Wells Fargo & Co., SunTrust Banks Inc., and PNC Financial Services Group. Under these arrangements, the banking companies can maintain their relationships with merchants by offering processing services from First Data under their own brands.
JPMorgan Chase has two such partnerships - Chase Merchant Services and Paymentech - with First Data. The Paymentech business was a joint venture between the processor and Bank One Corp., which JPMorgan Chase purchased last year.
James Dimon, JPMorgan Chase's president, said this spring that it was negotiating to consolidate the two ventures. Mr. Bell said there was nothing new to announce about these talks.
Chase Merchant Services was the top merchant acquirer in 2004, with 243,000 clients and total transaction volume of $255 billion, according to the industry newsletter The Nilson Report. Paymentech took the No. 3 spot, with 252,000 clients and volume of $212 billion.
Ms. Gupta said Wednesday that the deal announced Tuesday is expected to close by yearend. She said a small number of Citi employees would be affected - they might move and become First Data employees - but that no changes are expected until next year.
The deal would merge First Data's sales force, technology, and payments expertise with the bank's brand, retail presence, and commercial relationships, Ms. Gupta said. "We expect it will yield very beneficial results for our customers," she said.
First Data and Citi already had a relationship. In June, the banking company said it would shift its Sears, Roebuck and Co. merchant card portfolio to First Data. Citibank is also a customer of First Data's Star PIN debit network.
Many of First Data's acquirer partnerships with banks, including Paymentech and Chase Merchant Services, are what are known as equity alliances, because ownership of the businesses is divided equally, or nearly so.
Mr. Bell said First Data and Citi would share Citi Merchant Services' revenue, though he would not provide the exact split. Mr. Dodd, the analyst, speculated in an interview that it would be vastly in favor of First Data.
"The only input Citi has is sales leads," he said. "It's not going to be fifty-fifty."
Gregory W. Smith, an analyst for Merill Lynch & Co., wrote in a research note Wednesday that having Citi on its client list could be an advantage to First Data if JPMorgan Chase opted to exit its acquiring partnerships.
He predicted that First Data "would potentially pursue an alliance with Citi if the company was unsuccessful in maintaining its relationship with Chase," and that if JPMorgan Chase remains with First Data, "the new Citi alliance is icing on the cake" for the processor.
