MasterCard to Buy DataCash Group

Basking from a good quarter, on Thursday, MasterCard Inc. (MA - Analyst Report) agreed to purchase a European payment service provider, DataCash Group plc, for 360 pence per share, totaling to approximately £333 million or $520 million. The deal is scheduled to close by the end of October 2010, subject to shareholders’ and other regulatory approvals.

 

Basically, DataCash generates business by helping merchants accept customer payments online along with fraud prevention. DataCash lets merchants accept online payments from customers via Visa Inc.'s (V - Analyst Report) cards, MasterCards, eBay Inc.'s (EBAY - Analyst Report) PayPal and other services.

 

The proposed acquisition of DataCash is expected to benefit MasterCard in multiple ways and open avenues for long-term growth. With the assimilation of DataCash, MasterCard will be able to expand its presence in the rapidly growing e-commerce solutions business across Asia, Europe, Australia and other fast-developing emerging markets, where DataCash is thoroughly penetrated.

 

Besides, the acquisition of DataCash will help provide a competitive edge to MasterCard against its prime peer Visa, who expanded its payment service network by acquiring U.S.-based CyberSource Corp. in April 2010. Further, another Web-based competitor eBay owns PayPal that also deals in electronic payment and transfer of customer cash.

 

Apparently the deal appears to be a petite one comparing Visa’s purchase, however, with opportunities saturating in the U.S. market and e-commerce opportunities robustly growing in Europe and other emerging economies, picking up DataCash at this juncture seems to be a sound decision for MasterCard, which generates about 55% of its revenue from non-U.S. operations. Hence, exploring growth opportunities in this section will eventually bear fruit, making it a sound long-term strategy.

 

Moreover, the DataCash acquisition is not only expected to boost revenues but will also increase MasterCard’s merchant and clientele base across the globe, ensuring reduction in monetary loss from fraud. It would also provide them with fast and efficient connectivity to multiple payment networks.

 

While the deal is expected to dilute the fourth quarter earnings of MasterCard by about 5 cents due to amortization and other one-time costs, DataCash acquisition is projected to break even in 2011 and will be accretive to earnings from 2012 onwards.

 

DataCash was advised by UBS AG (UBS - Snapshot Report), whereas, Deutsche Bank AG (DB - Snapshot Report) advised MasterCard on the proposed deal.

 

MasterCard is the world's second-largest credit and debit card payment processing network, just behind Visa. It benefits from strong secular demand growth, meaningful international exposure, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium. However, we are concerned about MasterCard’s resilience and ability to raise prices, the detrimental effects of the recent financial reform Act and scope for increasing cash flow. Hence, the cautious outlook over the near term justifies our Neutral recommendation.