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13 AUGUST 2015

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Friday, 22 July 2011 09:09
Comment: Oberthur sale struggle highlights card industry challenges
Our story on Wednesday (July 20) that Oberthur was struggling to sell its card operation highlighted the significant challenges facing the card business today.
From a position only a few years ago when it was widely accepted that within time card payments would replace cash, this is no longer so straightforward and a certain.

Even if the term ‘card payment’ is replaced with ‘electronic payment’, to cover mobile and alternative payment methods, there is now uncertainty over what form payments will take.

Oberthur has decided it wants to lessen its investment in card manufacturing. This is not a major surprise. Card manufacturing has been moving towards a commodity business for some time, with low margins and increased competition from low cost regions, especially China, Taiwan and increasingly India.

No-one is disputing that we will still carry with us multiples of cards for payments, loyalty rewards, identity and membership, possible for decades yet. It is the profit from the operation that has become questionable.

There are two ironies.

The first is that Oberthur wants to sell its card business to buy De La Rue, which is a bank note printer.

The second is that it is finding it difficult to find a buyer.

First the reason for the sale:
It is no surprise that Oberthur wants to shed its card manufacturing business, but, according to the Wall Street Journal it plans to include its mobile smart card security and identity protection divisions. Mobile security and identity protection are crucial future sectors, which either means it does not have decent products, or it is not taking note of the direction payments are taking.

Regarding its difficulty finding a buyer:

Oberthur intends to sell 60% of its card business, but wishes to retain a high level of operational control. Has this desire for control scared investors who are wary of a business relationship that is hampered in this way?

The card division accounts for 73% of Oberthur’s revenue. In figures, this equates to Eur712.9m out of the Oberthur group’s Eur978.8m total revenue in 2010.

The card systems division comprises SIM cards (49% of revenues), bank cards (47%) and STB cards. After a sale, Oberthur would retain three areas of activity that have strong growth potential - the ID division (which includes digital passport technology), secure deposits and bank note printing.

The Oberthur Technologies Group had a consolidated net income of Eur59.232m in 2010, up from Eur49.215m in the previous year. An improvement, but it is making less than 6% profit on investment. Maybe Oberthur thinks De La Rue would increase its profitability.

There are some hurdles:

De La Rue rejected Oberthur’s £895m joint bid with Bain Capital, calling the takeover proposal "highly speculative" and refusing to open its books for due diligence. Also De La Rue remains part of a Serious Fraud Office enquiry into conduct of its employees, in connection with its contract with the Reserve Bank of India.

De La Rue reported in May, a 68% drop in full-year profit citing paper production issues, lower than expected banknote print volumes, changes in senior management and a takeover approach as the reasons.

However, De La Rue said today that it was making good progress on an improvement plan which it hopes will achieve operating profit of over £100m (US$161) within three years through revenue growth and cost savings. Its shares closed on Wednesday July 20 at 762.5 pence valuing the business at around £750m, which makes its percentage profit around 13%.

This makes the reasons behind Oberthur’s takeover plan understandable. But Bain Capital has pulled out of the deal. Has it too concluded that there are better places than card manufacturing to invest money. Banknotes perhaps?
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