Natixis S.A. (EPA: KN) – market cap as of 14/09/2018: €18.43bn

Introduction

On September 12th, 2018 Natixis S.A. announced an agreement for the proposed sale of its retail banking activities to its parent BPCE. The transaction includes the transfer of the firm’s consumer financing, factoring, leasing, sureties and guarantees, and securities services businesses and is valued at €2.7bn. The sale will provide Natixis with financial firepower while simultaneously allowing it to narrow its strategic focus to its core investment banking and asset management activities.

BPCE S.A.

BPCE S.A. is Groupe BPCE’s central institution and is responsible for its strategy, coordination and management. It provides a full range of banking and insurance services and is France’s second largest banking group. Groupe BPCE itself is not listed and instead maintains a cooperative ownership structure. The group has 36 million clients spread over its two retail banking networks, Caisse d’Epargne and Banque Populaire. In total, BPCE maintains 7,800 bank branches. Recent M&A activity includes the purchase of Fidor Bank, a German online bank operating in the UK and Germany, in July 2016 for an undisclosed amount. In 2017 BPCE’s revenues enjoyed year-on-year growth of 2.1%, driven mainly by strong growth in the Asset and Wealth Management business as well as the CIB.

Natixis S.A.

Natixis S.A. functions as the corporate and investment banking, asset management, insurance and financial services arm of Groupe BPCE. As of July 31, 2018, BPCE held 70.7% of its share capital, with 26.6% of share capital held by a diversified public ownership base. Natixis services both Group BPCE’s network as well as a range of corporate and institutional clients. Natixis’ AUM grew 1.4% year-on-year to reach €846bn as of Q2 2018, making it one of the world’s largest asset managers. In 2017, its corporate and investment banking activities generated revenues of €3.58bn and pre-tax profit of €1.3bn, representing 37.8% and 49.0% of the firm’s overall respective revenues and pre-tax profits.

Deal Rationale

The transaction will allow Natixis to strengthen its positioning within asset and wealth management as well as investment banking by allowing it to increase the amount of capital it holds for potential acquisitions from €1bn to €2.5bn. As the firm does not intend to hold excess capital, a special dividend of €1.5bn will be paid out in 2020 in case Natixis does not make any significant strategic acquisitions by then.

In the context of its New Dimension strategic plan, Natixis has bought stakes in three M&A boutiques, which it announced in March 2018. The bank has acquired majority stakes in Vermilion Partners, a specialist in Chinese cross-border transactions, and Fenchurch Advisory Partners, a UK specialist in financial services M&A. Additionally it has also taken a minority stake in Clipperton, a technology M&A boutique based in France. The bank is expected to make further similar acquisitions in the investment banking space to boost market share in its most profitable business line.

Additionally, the sale of its retail banking activities will allow Natixis to reinforce its value creation potential by reducing its cost of risk as a percentage of net revenues from a current value of 2.7% to a pro-forma figure of 2.2%, as well as making its cost base more flexible and revenues more geographically diversified with 53% of 2017 pro-forma revenues being generated outside of France. Additionally, as a result of the transaction, Natixis has raised its 2020 RoTE target from 13-14.5% to 14-15.5%. BPCE estimates that the deal will boost its 2020 net profits by €80m.

Industry Overview

According to KPMG, the total M&A deal volume in the financial institutions sector in 2017 ended totaled US$252.89bn divided across 3,020 deals, down 20% from US$318bn in 2016. Most of the deal activity has been driven by consolidation between players operating in the same regional area.

In Europe the landscape is currently very competitive within the sector, with banks trying to keep up with innovation to face disruptive changes brought by AI. Banks are recognizing that their core infrastructure no longer consists of physical branches. In 2015, banks’ digital servicing overtook branch servicing in most European countries. As branches are being used less intensively, the return on these physical assets is declining and banks are therefore choosing to invest their money elsewhere. European banks closed down over 9,000 branches in 2016 – which was a 4.6% reduction in a single year. At the same time strong consolidation is taking place between European players: UniCredit and Société Générale are rumored to be exploring a cross-border merger and Barclays is looking at a possible domestic merger with, or acquisition of, Standard Chartered. Indeed, profitability in banking has never fully recovered since the financial crisis and in this sense consolidation makes sense to drive up interest income while looking for cost synergies through centralization of operations.

Banks, however, are not concerned only about their European operations to improve performance. Some of them are indeed heavily investing to grow in the Asian market, as they still see lots of opportunities coming from the incredible growth that South-East Asian economies are showing (Thailand, Malaysia, Indonesia, Philippines). Morgan Stanley, Goldman Sachs, Barclays and Deutsche Bank are among the banks which are investing more heavily to build new product offering and hire specialist Asian Bankers from competitors.

At the same time, after Brexit, global banks are in the process of reorganizing their European operations. The French government has described France’s current climate in financial sector as attractive for businesses wishing to expand into mainland Europe. According to the European Financial Centers Index, Paris ranked number 1 in the EU, and is an international business center with the presence of major financial institutions, including BNP Paribas Fortis, AXA, Crédit Agricole and Société Générale.

Most of the deal activity in EMEA has been driven by consolidation between players operating in the same regional area. Indeed, banks have not pursued global expansion and focused more with limited M&A focusing more intently on domestic and regional markets. 2017 showed that around 75% of the deals were conducted in banks’ respective domestic market. A major reason behind this trend is the growing competition in the current low interest rate environment. More than 70% of financial institutions expect intensified competition from other banks and savings banks, while 85% say they expect increasing competition from fintech players as well.

Deal structure

The deal consists in the sale of a series of businesses from Natixis to is parent company BPCE SA for a total amount of €2.7 bn. The disposed divisions are consumer financing, factoring, leasing, sureties and guarantees, and securities services, but the exact valuation of each business remains undisclosed.

Natixis’ independent directors have approved the transaction on the 12th at the Natixis Board of Directors’ meeting. BPCE SA Supervisory Board also approved the transaction on the same date, with the condition that Board members who are also Natixis’ directors could not take part in the vote.

The realization of the transaction would imply a capital increase from BPCE SA, fully underwritten by the Banques Populaires and the Caisses d’Epargne.

Market reaction

Natixis’ stock is currently in the middle of a negative trend started in January. The price per share at the peak reached €7.4 and it has currently fallen to around €5.8. This trend is shared by all the French financial groups and banks, likely reflecting the political instability of Europe and a series of earning reports that fell short of expectations.

Amid this bearish trend, the announcement of the transaction sparked a jump in share price from €5.76 to €6.06, marking a 5.4% increase in the day following the announcement. Later on, the stock went down to €5.85. The overall post-announcement share price performance indicates that the transaction was well received by the market.

Financial Advisors

Morgan Stanley provided the fairness opinion on the deal.

 


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