AmEx to Buy Loyalty Partner - Analyst Blog

Boosting its international presence, American Express Co. (AXP) (AmEx) announced yesterday its intention to purchase Loyalty Partner, a premier German marketing services organization well known for its loyalty program, for €496 million (US $660 million). The deal is expected to culminate by the first quarter of 2011, subject to regulatory approvals. Loyalty Partner also offers consulting and analysis programs for merchants.

The transaction price comprises a cash payment of €425 million (US $566 million) and an additional €71 million (US $94 million) equity interest that will be held by Loyalty Partner's management. This equity interest will be subsequently acquired by Amex over the next five years for a definite value, depending on the operational performance.

Following the closure of the deal, Loyalty Partner will operate as a subsidiary of AmEx and will be included in the company's International Consumer and Small Business Services segment.

The induction of Loyalty Partner is expected to enhance AmEx's international operations, whereby, the latter will be able to distribute loyalty cards to millions of its cardholders. These loyalty cards help the consumers earn bonus points, discounts and exclusive benefits at numerous merchant locations, who also sponsor such customer offers.

This marketing support provided through a state-of-the-platform, including an exclusive network of relationship managers, is the key revenue driver for Loyalty Partner. Thus, the acquisition will help AmEx expand its range of incentives and loyalty marketing services for its consumers.

Further, the Loyalty Partner deal will not only drive AmEx's operating efficiencies but the acquisition will also bring in an additional 34 million consumers, thereby helping the company to penetrate deeper in key international markets such as Germany, Poland and India.

Moreover, this loyalty coalition model, which is based on the latest new generation mobile and digital marketing services, is rapidly growing in the financial service industry in order to retain customer loyalty. With an excellent management expertise, high-grade technology and a strong network of coalition partners, Loyalty Partner complements well with AmEx's long-term growth strategy.

On the other hand, merging with AmEx is also expected to boost Loyalty Partner's decade-long healthy operating history. The deal will not only help accelerate its consumer service offerings, it will also add higher value to coalition partner's business.

We believe that the acquisition of Loyalty Partner appears to be a positive step for AmEx's fundamental growth. This gets crucial when there is an express need to generate an alternate source of revenue, particularly now when AmEx primarily relies on its affluent customer base who make full and timely payments. Hence, the company loses out on the interest income, a chief revenue component for electronic card companies.

Further, given the impact of the recently enacted Dodd-Frank financial regulatory reform law, the processing fee and low interest rates on cards have ruined the revenue sources for the card companies, including AmEx, MasterCard Inc. (MA) and Visa Inc. (V).

The regulatory act is an attempt to protect consumers from heavy loans and debt crisis. However, this leaves little room for revenue expansion, for these companies, and is expected to adversely affect their financials. Hence, diversifying into loyalty marketing services in rapidly developing economies could be quite a back-up for AmEx in the long run.

Amex appointed UBS Investment Bank of UBS AG (UBS) as the financial advisor, while Cleary, Gottlieb, Steen & Hamilton LLP acted as the legal advisor for the deal.