Natixis/Ingenico: We validate the move!

[dropcap]N[/dropcap]atixis confirmed this morning its interest in the French company Ingenico. We mentioned this possibility in February 2018 as Natixis wants to push into the payments industry.

This interest and the recent sale of retail banking activities (factoring and leasing) to parent company Banques Populaires Caisses d’Epargne (BPCE) confirm Natixis is moving away from balance-sheet-based banking activities.

Ingenico’s closing price values the company at about €3.9bn. Given the sharp decrease ytd (-25%) and potential counter-bids, a 20% premium on the company is possible. Hence, Natixis would need to pay Ingenico about €4.7bn.

Natixis is down about 5% as, if the scenario was confirmed, the €1.5bn special dividend and a capital issue would be necessary for this acquisition.

Natixis has been completely reshaped since 2008 as most of its profits are now made via asset management and other capital-light activities.

Its parent company, BPCE, has a huge retail network, enabling considerable cross-selling in the insurance and asset management areas.

Natixis has recently made an important push in the payment services area, which we find to be a positive move. The banking sector is reshaping towards a platform model and payments are the main driver of that®evolution.

BPCE seems to be indicating a clear direction for Natixis with a smooth exit of balance-sheet-based activities towards a fintech model.

BPCE’s retail network makes this move all the more easier as it can push Natixis Payment solutions to its merchant clients (be it offline or online).

We therefore see important revenues synergies and exponential revenue growth from this move. Investors are yet often defiant regarding revenue growth when M&A happens. They indeed look for immediate cost synergies.

Natixis Payment solutions does not disclose the amount of total expenses but given it is a fast-growing division and the €390m revenues to be generated in 2018, we bestguess €350m in total expenses or €270m post-tax.

As Payment is a business of scale, we believe integrating Ingenico in this division could cut most (if not all) Natixis Payment solutions’ current costs or about €220m.

This is quite a pretty good calculation but the market puts more value on the dividend than growth and worries about a dilutive capital raising.

The acquisition would be fully equity-financed as, given Ingenico’s balance sheet, the €4.7bn paid for the acquisition will be goodwill (fully deductible from common equity tier 1 according to banking prudential rules).

Natixis’ capital available for acquisitions is €2.5bn until 2020. This allows for an 11% CET1 ratio which is management’s target at the end of 2020. Therefore Natixis would have to raise about €2bn in equity.

According to our calculation, and taking into account cost synergies (post-tax) of €250m, EPS in 2020 would be equal to €0.80 post-acquisition versus €0.72 pre-acquisition.

Flexible balance sheet

Real capital requirements are at 9%. We believe therefore that Natixis would be comfortable with a temporary (even permanent) ratio below management’s target.
Hence, targeting a 10.5% CET1 ratio would remain reasonable and, given the strategic importance of this acquisition, a temporary lower payout ratio would enable it to minimise the equity raising (in the area of €1bn).

We had already mentioned this likelihood and maintain our positive recommendation on this deal.

Full fundamental analysis on Natixis and Ingenico available : Click here