Fifth-Third Selling 51% of Payment Processing Unit to Advent

Advent International has agreed to acquire a 51% stake in the payment processing business of Fifth Third Bancorp (Nasdaq: FITB). The deal values the unit at $2.35 billion, with Advent expected to contribute $561 million in equity. 


Fifth Third Bancorp (Nasdaq: FITB) and Advent International announced today that they have signed a definitive agreement whereby Advent International will acquire a 51% interest in Fifth Third’s processing business through the establishment of a joint venture that values the new company at approximately $2.35 billion before valuation adjustments by either party. Fifth Third will retain the remaining 49 percent interest in the new company, Fifth Third Processing Solutions, LLC.


Pursuant to the agreement, Fifth Third Bank (OH), an indirect wholly owned subsidiary of Fifth Third Bancorp, will contribute the assets and operations of Fifth Third’s merchant acquiring and financial institutions processing businesses to a new limited liability company (“LLC”). The LLC’s capitalization prior to the purchase of this interest will include senior secured notes payable to subsidiaries of Fifth Third in the amount of $1.25 billion. Advent will pay Fifth Third $561 million in cash for a 51 percent ownership interest in the equity of the LLC and for certain put rights. Additionally, Fifth Third will receive warrants in the new company exercisable in certain circumstances. Fifth Third estimates the valuation adjustments related to these warrants, the put rights, and minority interest discounts may reduce its implied valuation of the business by an estimated $50 million. The agreement is subject to certain potential purchase price adjustments. The terms and conditions of the transaction are more fully described in Fifth Third’s Form 8-K filed on March 30, 2009. The transaction will be accounted for under Financial Accounting Standard 160, “Noncontrolling Interests in Consolidated Financial Statements.” Fifth Third will retain its credit card issuing business, including retail credit card and commercial multi-card services.


“Advent has a long and impressive record of investing in and growing payment processing companies to achieve exceptional results, and we believe that its investment will significantly enhance the ability of our processing business to generate even stronger results in the future,” said Kevin T. Kabat, Chairman, President and CEO of Fifth Third Bancorp. “Partnering with Advent will provide the processing business with access to additional capital and resources that we believe will create significant new opportunities and incremental growth in that business. At the same time, our ability to offer the best-in-class capabilities of Fifth Third Processing Solutions to our banking customers will continue to be a key entry point for us in creating new relationships and in expanding existing relationships.”


“This transaction represents the culmination of work we began last summer as part of our capital plan announced in June. It is expected to generate meaningful additions to our tangible common equity and Tier 1 capital ratios, reflecting the value of the business as a whole, while at the same time enabling us to retain significant ownership in the joint venture and its ongoing creation of value. The cash proceeds represent 13 times the earnings divested. And the valuation of the business, at 3.3 times 2008 net revenue, compares favorably with large publicly-traded processing businesses. The expected equity and capital contribution reflects not only the economic value of the interest being sold, but also the economic value of our remaining interest in the business. As a result, this transaction represents a highly efficient source of capital for our shareholders relative to capital alternatives in the current environment.”


“The transaction significantly enhances the level and composition of our already very strong regulatory capital position. We believe our strengthened capital position, in combination with our strong credit reserves and earnings power; provide us with the resources and the ability to withstand a more difficult economic environment should that occur.”


“We are excited to enter into this partnership with Fifth Third,” said David Mussafer, Managing Partner of Advent. “We have long viewed Fifth Third Processing Solutions as the premier processor for merchants and financial institutions in the U.S., and we look forward to working with Fifth Third and the management team of the processing business to continue the impressive growth of the business. We are excited about opportunities to make further investments in this business, and we expect to leverage our international infrastructure and work with Fifth Third Processing Solutions to expand outside the U.S.


“We are pleased to welcome Advent as a partner and investor in our processing business,” said Charles Drucker, President of Fifth Third Processing Solutions, who will be CEO of the new joint venture company. “Over the years, we have successfully built our processing business into one of the country’s leading providers of payment processing services. Advent’s worldwide set of portfolio companies in financial services and payments processing provides Fifth Third Processing Solutions with new opportunities to partner internationally. The technology focus and operational expertise of Advent and its partners will provide us with significant opportunities to enhance the wide range of products and services that we offer to clients.”


“Our customers and employees should expect a smooth transition. Our industry-leading platform will remain in place, so our clients will not experience a system conversion, and our clients will continue to be served by the same people from Fifth Third Processing Solutions in the same locations. We look forward to working with the Advent team to grow the business going forward.”


Advent has been investing in the financial services sector for over 20 years, and has backed more than 25 companies worldwide in a broad range of sub-sectors, including payments, transaction processing, and financial technology. Advent has done several transactions of particular relevance to Fifth Third Processing Solutions: CSU CardSystem is a leading card processor in Brazil, which went public in 2006; DolEx Dollar Express, a leading money transfer business which Advent sold to Global Payments in 2003; and Monext, a French merchant acquirer and bank processor which Advent acquired in 2008.


“As a processor, Fifth Third Processing Solutions has tremendous scale in both of its core businesses, merchant acquiring and debit/ATM processing,” said Chris Pike, Managing Director of Advent. “Working with our operating partner, Pam Patsley, we had identified Fifth Third Processing Solutions early on as the premier company in the payment processing space. We worked closely with Fifth Third to structure a transaction and a partnership that met our mutual objectives in a difficult environment, and to position the business for accelerated growth over this next exciting period. Patsley is the former President of First Data International, where she was responsible for all of the company’s business outside of the U.S. from 2002 to 2007.”


The transaction is expected to contribute significantly to Fifth Third’s retained earnings, capital levels and capital ratios, generating an expected pre-tax book gain of an estimated $1.7 billion and increasing Fifth Third’s tangible common equity and Tier 1 capital by an estimated $1.2 billion. On a pro forma basis, the estimated increase in Fifth Third’s tangible common equity to tangible asset ratio at December 31, 2008 would have been more than 0.9 percent, to approximately 5.2 percent, and its Tier 1 capital ratio would have been increased by an estimated 0.9 percent to approximately 11.5 percent. Fifth Third’s December 31, 2008 pro forma book value per common share would have been an estimated $15.21, compared with the $13.57 reported, and its tangible book value per common share would have been an estimated $10.74, compared with $8.74. On a pro forma basis for 2008, the transaction would have been dilutive to Fifth Third’s earnings by an estimated $100 million, or approximately 17 cents per share, of which $57 million or $0.10 per share represents non-cash intangibles amortization.


The transaction is subject to regulatory review and approval by the Ohio Department of Financial Institutions as well as review under the Hart-Scott-Rodino Act. It is currently expected to close in the second quarter of 2009. Credit Suisse acted as exclusive financial advisor, while Sullivan & Cromwell, LLP, Chapman & Cutler, LLP, Alston & Bird, LLP, and Graydon Head & Ritchey, LLP acted as legal advisors to Fifth Third in this transaction. Morgan Stanley and Weil, Gotshal & Manges, LLP acted as financial and legal advisor, respectively, to Advent.


About Fifth Third Bancorp and Fifth Third Processing Solutions

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $120 billion in assets, operates 16 affiliates with 1,308 full-service Banking Centers, including 93 Bank Mart(R) locations open seven days a week inside select grocery stores and 2,350 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina. Fifth Third operates five main businesses: Commercial Banking, Branch Banking, Consumer Lending, Investment Advisors and Fifth Third Processing Solutions. Fifth Third is among the largest money managers in the Midwest and, as of December 31, 2008, has $179 billion in assets under care, of which it managed $25 billion for individuals, corporations and not-for-profit organizations. Investor information and press releases can be viewed at Fifth Third’s common stock is traded on the NASDAQ(R) National Global Select Market under the symbol “FITB.”


Fifth Third Processing Solutions is a premier source of payment acceptance services for leading businesses nationwide, providing electronic funds transfer (EFT), debit, credit and merchant transaction processing to support the complex payment strategies for the Bank and its merchant and financial institutions clients. In 2008, Fifth Third Processing Solutions processed over 28.4 billion ATM and point of sale transactions and processed over $292 billion of debit and credit card sales volume. Additionally, Fifth Third Processing Solutions supports over 171,000 merchant and financial institution locations and 11,000 ATMs in 44 states and 11 countries. According to the Nilson Report (March 2008), Fifth Third is the fourth largest bankcard acquirer.


About Advent International

Founded in 1984, Advent International is one of the world’s leading global buyout firms, with offices in 15 countries on four continents. A driving force in international private equity for more than two decades, Advent has built an unparalleled global platform of 140 investment professionals across Western and Central Europe, North America, Latin America and Asia. The firm focuses on international buyouts, strategic restructuring opportunities and growth buyouts in five core sectors, working actively with management teams to drive revenue and earnings growth in portfolio companies. Since inception, Advent has raised $24 billion (€18 billion) in private equity capital and, through its buyout programs, has completed more than 250 transactions valued at over $40 billion (€27 billion) in 40 countries.