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American Express: Will Wells Fargo Really Buy It Out?
Citigroup’s Donald Fandetti and Steven DeBartolo consider reports that
Wells Fargo (WFC) could be considering a purchase of American Express (AXP):
Reuters
News reports [yesterday] suggest American Express could be an acquisition
target of Wells Fargo, though sources are investment bankers not mgt. In
addition, the report raised the prospect of senior mgt changes and that
Chairman & CEO Ken Chenault is having conflict with the Board. Note that
Berkshire Hathaway (BRK.B) (Warren Buffett) owns a 15.6% equity stake in
American Express and a 9.8% stake in Wells Fargo.
Historically (pre-credit crisis), there have been investor discussions on
whether or not a large bank could acquire American Express, so with the
stock underperformance we are not surprised to hear them resurfacing. And
this follows the activist investment from ValueAct, who bought a $1B equity
stake then ultimately exited the position. More recently after weak Q4
results, we have heard investors theorizing about a potential Wells Fargo/
Amex combination, due mostly to the Berkshire involvement. In terms of
valuation, American Express shares are clearly cheap at 10x our ’17 est,
and the stock is at a steep discount to the S&P500 vs the historical 1.02x
relative multiple. Moreover, as we show in Figure 1, a sum-of-the-parts
suggests a normalized multiple of 14.5x (or $81 per share), given that ~31%
of net income is from the higher multiple card network & acquiring segment.
While sum-of-the-parts is an important data point for perspective on a
potential take out, we are not believers that it makes sense for American
Express to separate their network/acq segment. On mgt changes, a frequent
topic in our discussions with investors is whether or not current mgt is
willing to right size the business for the more competitive, lower ROE
environment. We reiterate our Buy rating and believe M&A discussions could
support a better bid for the stock and counter some secular decline concerns.
Strategic Implications: A bank might be interested in American Express to
grow their card issuing business and to push further into the high growth/
return payments sector. American Express generates a ~25% ROE vs banks ~9-12
%. And banks with traditional retail deposits have a much lower cost of
funding (Wells Fargo sub-40 bps vs American Express at ~150 bps), which
would drive synergies. On Wells Fargo, they have been actively growing their
consumer card portfolio but it remains modest at $34 B vs peers closer to $
100B. Wells Fargo also has a corp card business, which is much smaller than
American Express that generates 20% of global billings from large corp T&E.
While we don’t know more than what’s in the news reports, a few questions
come to mind; 1) would the Fed approve such a large deal (American Express
mkt cap of $56 B, Wells Fargo $254 B), 2) how would a bank view the charge
card product which is 56% of USCS billed biz, 3) would a bank issuer then
shift away from the other card networks and use American Express’s network,
4) how would it impact Global Network Services, where American Express acts
solely as the network for other banks (Wells Fargo is a GNS customer), 5)
does Wells Fargo want a closed-loop network to better compete in the new
digital world, similar to what JPMorgan Chase (JPM) is building with
ChaseNet, and 6) would a bank, who’s main interest is asset growth,
potentially undervalue the scarcity value of a global network. American
Express’ investor day is this Thursday, March 10th.
Shares of American Express have ticked up 0.2% to $59.11 at 9:35 a.m. today,
while Wells Fargo has dropped 0.9% to $49.62, JPMorgan Chase has fallen 1%
to $59.33, and Berkshire Hathaway has dipped 0.1% to $138.56.
Citigroup’s Donald Fandetti and Steven DeBartolo consider reports that
Wells Fargo (WFC) could be considering a purchase of American Express (AXP):
Reuters
News reports [yesterday] suggest American Express could be an acquisition
target of Wells Fargo, though sources are investment bankers not mgt. In
addition, the report raised the prospect of senior mgt changes and that
Chairman & CEO Ken Chenault is having conflict with the Board. Note that
Berkshire Hathaway (BRK.B) (Warren Buffett) owns a 15.6% equity stake in
American Express and a 9.8% stake in Wells Fargo.
Historically (pre-credit crisis), there have been investor discussions on
whether or not a large bank could acquire American Express, so with the
stock underperformance we are not surprised to hear them resurfacing. And
this follows the activist investment from ValueAct, who bought a $1B equity
stake then ultimately exited the position. More recently after weak Q4
results, we have heard investors theorizing about a potential Wells Fargo/
Amex combination, due mostly to the Berkshire involvement. In terms of
valuation, American Express shares are clearly cheap at 10x our ’17 est,
and the stock is at a steep discount to the S&P500 vs the historical 1.02x
relative multiple. Moreover, as we show in Figure 1, a sum-of-the-parts
suggests a normalized multiple of 14.5x (or $81 per share), given that ~31%
of net income is from the higher multiple card network & acquiring segment.
While sum-of-the-parts is an important data point for perspective on a
potential take out, we are not believers that it makes sense for American
Express to separate their network/acq segment. On mgt changes, a frequent
topic in our discussions with investors is whether or not current mgt is
willing to right size the business for the more competitive, lower ROE
environment. We reiterate our Buy rating and believe M&A discussions could
support a better bid for the stock and counter some secular decline concerns.
Strategic Implications: A bank might be interested in American Express to
grow their card issuing business and to push further into the high growth/
return payments sector. American Express generates a ~25% ROE vs banks ~9-12
%. And banks with traditional retail deposits have a much lower cost of
funding (Wells Fargo sub-40 bps vs American Express at ~150 bps), which
would drive synergies. On Wells Fargo, they have been actively growing their
consumer card portfolio but it remains modest at $34 B vs peers closer to $
100B. Wells Fargo also has a corp card business, which is much smaller than
American Express that generates 20% of global billings from large corp T&E.
While we don’t know more than what’s in the news reports, a few questions
come to mind; 1) would the Fed approve such a large deal (American Express
mkt cap of $56 B, Wells Fargo $254 B), 2) how would a bank view the charge
card product which is 56% of USCS billed biz, 3) would a bank issuer then
shift away from the other card networks and use American Express’s network,
4) how would it impact Global Network Services, where American Express acts
solely as the network for other banks (Wells Fargo is a GNS customer), 5)
does Wells Fargo want a closed-loop network to better compete in the new
digital world, similar to what JPMorgan Chase (JPM) is building with
ChaseNet, and 6) would a bank, who’s main interest is asset growth,
potentially undervalue the scarcity value of a global network. American
Express’ investor day is this Thursday, March 10th.
Shares of American Express have ticked up 0.2% to $59.11 at 9:35 a.m. today,
while Wells Fargo has dropped 0.9% to $49.62, JPMorgan Chase has fallen 1%
to $59.33, and Berkshire Hathaway has dipped 0.1% to $138.56.
