Cielo’s Bovespa Star Seen Fading With Itau’s Redecard Bid

Cielo SA (CIEL3), Brazil’s biggest card- payment processor, is in danger of losing its rank as the best performer in the nation’s benchmark stock index if Redecard SA (RDCD3) is bought out by Itau Unibanco Holding SA. (ITUB4)

Cielo has gained 42 percent this year, compared with a 4.6 percent decline for the 68-company Bovespa index. Redecard, the nation’s No. 2 processor, climbed 9.5 percent on the year to close at 31.95 reais on June 6. Itau offered in February to buy the 49.99 percent of Redecard it doesn’t already own for 11.8 billion reais ($5.8 billion), or 35 reais a share.

Itau, Latin America’s biggest bank by market value, would be able to cut prices at Redecard, pressuring Barueri-based Cielo to do the same and limiting its ability to gain market share, said Carlos Eduardo Daltozo, an analyst at Banco do Brasil SA. Itau could lower the discount rate that determines how much retailers pay for each credit-card transaction if merchants buy other banking products, he said.

“Itau’s offer may change the competitive landscape for card processors and that may be a trigger for people to reduce their positions in Cielo,” Daltozo said in a phone interview. He has a market perform rating on the stock and a price target of 64 reais.

Cielo would face a competitive disadvantage if it becomes Brazil’s only publicly traded payments processor because it would have to disclose strategic financial data that Redecard could keep private as a unit of Itau, according to Flavio Yoshida and Andre Parize, analysts with Votorantim Corretora.

‘Highly Negative’

That would be “highly negative to Cielo and the whole industry,” Yoshida and Parize, wrote in a May 15 note to clients. The analysts have a market perform rating on Cielo, with a price target of 60 reais. The shares closed at 56.85 on June 6.

“Any information about Cielo’s operation will be used by Itau to enhance its acquiring business,” the analysts wrote. Cielo and Redecard, which is also based in Barueri, are known as merchant acquirers. They help businesses accept credit cards and serve as middlemen to the world’s biggest payment networks, including Visa Inc. (V) and MasterCard Inc. (MA)

Cielo declined to comment, according to its outside public relations company in Sao Paulo.

On Feb. 7, less than five years after Redecard went public, Itau announced its plan to pursue full ownership, citing a need to make the payments processor more agile.

Lazard Asset Management LLC, whose 10 percent stake makes it Redecard’s second-biggest investor, criticized the offer and recommended on May 3 that Credit Suisse Group AG be hired to provide a new appraisal of the company, a move that Redecard shareholders approved in a vote two weeks later. Credit Suisse had 30 days from that date to prepare the new appraisal.

Selling Stake

Itau Chief Executive Officer Roberto Setubal has said he won’t increase the company’s bid even if Credit Suisse says it should be higher, and that Itau may abandon the buyout plan and sell its stake instead. Shares of Redecard have dropped 9.1 percent since Itau threatened to withdraw the offer.

Cielo has expanded in each of the past five quarters, boosting its market share to 60.2 percent without lowering merchant discount rates or fees for point-of-sale equipment. That growth has come at the expense of Redecard, whose market share was 39.8 percent as of March 31, according to an April 25 first-quarter earnings statement from Cielo.

Cielo and Redecard started to face stronger competition after a Brazil central bank ruling in July 2010 ended exclusive rights for the processing of certain transactions. Before the ruling, Cielo had exclusive rights to handle Visa cards transactions, and Redecard had exclusive rights on MasterCard.

Cielo, whose advertising slogan is “nothing beats this machine,” has established partnerships with its two controlling shareholders, Banco do Brasil and Banco Bradesco SA, as well as with HSBC Holdings Plc and Caixa Economica Federal, expanding the distribution channels for Cielo products.

American Express

The machine, which accepts cards issued by American Express Co. and those from domestic meal plan Ticket Restaurante, owned by Paris-based Accor SA, also gives merchants the option to sell products in installments.

“The credit-card holder can access financing that has been pre-approved by banks through our service,” Roberta Noronha, Cielo’s investor relations director, said at a conference in Rio de Janeiro on May 21. Cielo, which currently offers such credit lines only from its controlling shareholders, is negotiating partnerships with other banks to provide the same service.

Profit Surge

Cielo’s first-quarter profit surged 33 percent to a record 566.6 million reais, and its return on equity was higher than 97 percent of all companies in the industry worldwide, according to data compiled by Bloomberg. At 155 percent, 12-month return on equity is almost double Redecard’s 82 percent.

Cielo may continue to gain even if Redecard is delisted because, as the only credit-card company on the Bovespa, the company will attract all of the investors who want to bet on the sector, said Henrique Caldeira, a Barclays Plc analyst in Sao Paulo.

“It’s definitely not time to sell,” said Caldeira, who rates Cielo overweight with a price target of 63 reais a share. “The company has posted fantastic operating results, and there is no indication that will change anytime soon, whatever the outcome of the Itau offer may be.”

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net

To contact the editors responsible for this story: Steve Dickson at sdickson1@bloomberg.net; Adriana Arai at aarai1@bloomberg.net

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