The Diners Club charge card franchise will be acquired by National Australia Bank as part of its acquisition of Citigroup’s local domestic banking business after the parties agreed to a string of “additional conditions”.
NAB announced that it was acquiring Citi’s Australian retail operations in August. However, the future of the Diners Club business remained unclear because NAB boss Ross McEwan did not directly reference charge cards in his presentations to investors and also indicated that inclusion of the Diners asset in the transaction was subject to further undisclosed conditions.
However, both NAB and Citi confirmed to Banking Day in the last week that ownership of the charge card operation would be changing hands when the sale is completed early next year.
Diners is the second largest issuer of charge cards in Australia behind American Express and the biggest contributor to its revenue line is its longstanding arrangement with the Commonwealth Government to supply charge card services across the public sector.
A Citi Australia spokesperson confirmed on Monday that responsibility for servicing the Commonwealth mandate would move to NAB as part of the sale.
“The Commonwealth mandate you are referring to is part of the Diners Club portfolio, and will transfer to NAB in March 2022, when the sale transaction is expected to complete,” the spokesperson said.
The current tender for the Commonwealth charge card mandate is due to expire at the end of December 2023.
NAB said in August that it would pay a A$250 million premium to the net assets of Citigroup’s retail banking operations in Australia.
That puts the price of the deal at about $3.77 billion because Citi reported net assets of $3.47 billion on its balance sheet at the end of December.
It remains unclear whether the price might be adjusted by the inclusion of Diners Club in the transaction given that it accounts for approximately $124 million of Citigroup’s book value.
The other potential additional cost for NAB is licensing fees it may have to pay US financial services company, Discover Financial, the owner of the international network used to process Diners Club transactions.
NAB will no doubt provide additional disclosure regarding such matters in the future, but faces a strategic challenge to renew Diners Club’s financial performance after it absorbed big revenue hits as a result of the pandemic.
According to accounts lodged with ASIC, Diners’ revenue more than halved to $17 million in the 12 months to the end of December 2020 even though the value of receivables on its balance sheet only declined by 9 per cent.
This led the company to report a net loss of $11.3 million last year.
Grant Halverson, a financial services consultant and a former managing director of Diners Club’s Australia, believes NAB might have been able to acquire the charge card issuer at less than net assets.
“Given the decline in the business – receivables down by nine per cent and revenue down by 52 per cent – you would be struggling to pay a lot for it,” he said.
Notwithstanding that judgement, Halverson thinks that NAB could extract significant long-term