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Discovery to pay FirstRand R1.8bn to exit credit card JV

Transaction to be funded by equity issuance, bank to be launched in the fourth quarter.
Discovery is to pay to FirstRand Investment Holdings R1.8 billion to exit its Discovery card joint venture. Picture: Moneyweb

Discovery is to pay FirstRand Investment Holdings R1.8 billion to exit its Discovery Card joint venture.

In February, Moneyweb exclusively reported that Discovery would integrate its credit card business, operated through a joint venture with FNB into its own banking offering. Discovery holds a 74.99% interest in the Discovery Card business with FNB parent company FirstRand holding the remaining 25.01%, through an investment holdings subsidiary. At the time, it was expected that the business would be transferred into Discovery’s bank on the same effective ratio.

The group has now disclosed that the Registrar of Banks requires the proposed 25.01% crossholding in Discovery Bank by FirstRand to be to reduced and ultimately exited over a five year period.

“Given this condition, Discovery and FirstRand Investment Holdings have since agreed that it would be preferable for FirstRand Investment Holdings to exit entirely as soon as practically possible,” it said in a Sens statement.  

As such, Discovery is to acquire FirstRand’s effective interest and economic interest as well as all rights to the Discovery Card book and related assets for R1.8 billion. It is to fund the transaction by way of an equity issuance. “Given the relative immateriality, the transaction does not require shareholder approval,” it said.

Discovery chief executive Adrian Gore told Moneyweb that the R1.8 billion valuation was formula driven, having earlier explained to analysts that it is paying R700 million to buyout the Discovery Card joint venture and R1.1 billion for FirstRand’s 25.01% shareholding. He added that Discovery was buying the card at a price-to-earnings (P/E) ratio of 15x.  

The R1.8 billion transaction coupled with Discovery’s R1.3 billion payment to increase its participation in the joint venture from 20% to 74.99% has unlocked R3 billion in value for FirstRand shareholders, FirstRand said in a statement.  

The arrangement between Discovery and FirstRand is still subject to regulatory approval and means  that Discovery Bank is set to be launched in by the end of 2018, almost one quarter later than expected.

Discovery first announced its intention to enter banking in September last year and had earmarked R1.5 billion in preparation. 

Discovery’s management team has long maintained that it would only enter a market that it could disrupt and add meaningful value to.

The company has yet to detail its banking product offering or pricing. However, the new bank is widely expected to make use of the Vitality shared-value rewards model, with which Discovery has had great success in South Africa and abroad.

Neelash Hansjee, an analyst at Old Mutual Investment Group, said the highly anticipated bank is set to be a strong competitor in the market. “Discovery is considered as a strong competitor as they have a strong brand in the market, an existing card product and a large customer base within the Vitality network.”

 It is expected to face stiff competition from the likes of banking behemoths Absa, FNB, Nedbank and Standard Bank, some of which have recently been overhauling products, extending and enhancing services, and beefing up their rewards programmes.

Investec, which now offers long-term insurance products, and Sasfin will provide competition for professional and high net worth clients while Capitec continues to grow its market share in the mid to high-income markets. Insurance group Old Mutual is also ramping up its transactional banking offering.      

Discovery is to be one of several expected new entrants in the banking market in the coming months alongside TymeDigital by Commonwealth Bank, Michael Jordaan’s Bank Zero, SA Post Bank and the Young Women in Business Network’s co-operative outfit. African Bank, following curatorship, is also working to relaunch a transactional banking product.

For the year ended June 30, 2018, Discovery reported a 17%  increase in normalised profit from operations to R9.27 billion, and normalised headline earnings per share rose 16% to R8.37. It declared a dividend of a final dividend of R1.14 per ordinary share.   



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