Global Aspirations: International and Cross-Border ARM M&A Activity Gains Momentum

With the U.S. domestic market maturing, and competition also stiffening in other countries, debt collection and debt purchasing firms are eying foreign shores.

For a number of years, American creditors and agencies looking to cut costs have ventured to near-shore and off-shore locations, setting up call centers in Canada, Mexico, and the Caribbean, as well as India and the Philippines, to contact debtors in the United States. American debt collectors following clients into international markets tended to grow organically or through joint venture relationships, identifying and meeting specific client needs overseas, notes Michael Lamm, Associate at Kaulkin Ginsberg, a Bethesda, Md.-based merger and acquisition advisory firm serving the accounts receivable management industry.

However, as interest in doing business with clients based in foreign markets has increased, firms from a variety of countries, including the U.S., Canada, France, Luxembourg, Israel, Australia, and India, have favored an acquisition strategy to gain local expertise and a foothold in a foreign market. Target companies have been located in the U.S., the UK, Germany, Australia, Russia, South Africa, and Malaysia – to name a few. “As the ARM market continues to globalize, investment firms and buyers of ARM companies are becoming more aggressive in locating acquisition opportunities in other geographic markets that support greater growth potential in the coming years,” says Mark Russell, Director of Kaulkin Ginsberg’s Strategic Advisory Group.

In 2006, the ARM industry saw 20 international M&A transactions, ones where either the buyer or seller – or both — are based outside the United States. Twelve, or 60 percent, were cross-border transactions, according to data compiled by Kaulkin Ginsberg. That’s a hefty percentage compared to a nearly 36 percent ratio of cross-border M&A transactions among middle market firms in Europe and 26 percent in NAFTA countries (the U.S, Canada, and Mexico), according to recent data from the International Network of Merger and Acquisition Partners. IMAP’s numbers cover a variety of industry sectors, including automotive, food, life sciences, global energy, I.T. and electronics, as well as outsourcing and logistics.

This year the pace of international deals in the first quarter is running significantly ahead of the same period last year, when only two such deals were announced. The ratio of cross-border ARM link-ups is also high. In the first two-and-a-half months of 2007 alone, Lamm reports, seven international deals have been struck – five, or slightly more than 70 percent, with a cross-border bent.

Follow the Money

Who is buying and funding these deals? Industry players were involved in nine of the 20 international acquisitions, five of them cross-border buys in 2006. Two industry buyers concluded two cross-border transactions each, and one closed the remaining deal. Among them: Last summer NCO took a 75 percent stake in Australian Receivables Ltd., which early this year expanded its operations with the acquisition of another Aussie firm, Statewide Mercantile Services; NCO also completed its takeover of Star Contact, a Panama-based contact center company that NCO says it intends to use to launch customer relationship management (CRM), accounts receivables management (ARM), and debt purchasing for Latin America. Luxembourg-based Transcom Worldwide S.A., a European CRM and debt collection company, acquired two European debt collectors – Finsterer + Koenigs Inkasso GmbH in Germany and Credit Business Services Ltd. in the UK. And early this year Credit Corp Group Ltd., a leading publicly traded collection firm in Australia, acquired Pioneer Credit Malaysia, a consumer receivables management firm in Malaysia.

Private equity and other financial firms are also in the hunt. In fact, they were involved in another nine of the 20 international ARM transactions last year, including five cross-border deals. For example, a National Bank of Canada subsidiary, National Bank Financial, acquired a majority interest in Credigy Solutions Inc., a debt purchasing and servicing company with operations in the U.S. and Brazil. The investment banking firm of Goldman Sachs acquired a stake in the Moscow-based collection agency Sequoia Credit Consolidation. Nikko Principal Investments Ltd. purchased an 85 percent stake in UK-based Clarity Credit Management Solutions Ltd. to add to its earlier acquisition of Cabot Financial, one of the largest debt purchasers and collectors in the UK. “In fact,” notes Kaulkin Ginsberg’s Russell, “there were private equity firms on both sides of the Cabot transaction.”

Organic Expansion

Still, not all ARM firms interested in international expansion are opting for acquisition as their strategy-of-choice. The proverbial exception that proves the rule, Phillips & Cohen Associates, headquartered in New Jersey, elected to use a niche service – deceased debt recovery – as an entrée into the UK market. In February of this year, the agency announced the opening of an office in Manchester, England. “We’re a full-service collection agency in the U.S.,” notes Adam S. Cohen, the firm’s co-chair and CEO. Referring to collecting debt owed by individuals who have passed away, he says, “It’s a sensitive situation and an underserved market.” For most clients, he points out, it’s a new revenue stream, a fact that opens doors faster than traditional collections. “Not many firms have it as a fulltime focus so it makes more sense for us to grow organically,” Cohen explains.

As it stands, the firm is already assessing opportunities in other lands. Although reluctant to tip his hand, Cohen does say he views the Manchester office as a “leaping off point” for Scotland, continental Europe, and beyond.

Buying In

“Credit grantors are expanding internationally, and companies providing debt collection and purchasing are being forced to keep up,” notes Mike Ginsberg, Kaulkin Ginsberg President and CEO. Cross-border M&A gives agencies and debt buyers access to new clients. However, entering a foreign market can be fraught with pitfalls. Cultural differences, as well as language, legal, and regulatory ones, can be vast. Acquiring an established local firm can help ease the way. To be successful, Ginsberg says, buyers need to retain senior management with “skin in the game” – for the long, not just the short, term.

Management is key in every transaction. It is even more essential in cross-border ones. If a takeover candidate does not have a strong enough team, a buyer faces an execution risk, warns former EMCC Chief Executive Stacey J. Schacter. EMCC backed away from at least one cross-border deal for that reason, he reports. “We would have had to invest a lot of money and it might be a distraction for management to operate so far away. So it was not in the best interest of the company,” he explains. In addition, he cites some area-specific concerns. In the UK, he says pricing is too high; in Italy, he sees significant risk with the legal system; in China, the challenge is to understand the marketplace. “Foreign markets need a lot of tender, loving care,” Schacter says, “to bring them up to a level of sustainable profitability.”  

The UK

Several M&A deals – domestic and cross-border – have been concluded in the UK during the past year. In addition to the Transcom and Nikko deals cited above, Sovereign Capital, a UK-based venture capital firm, acquired the international outsourcing division of Buchanan, Clark and Wells, a collection agency based in Glasgow, Scotland. Last summer, UK-based Equidebt acquired another UK firm, European Collections & Investigations (ECI). Two transactions already have been announced this year:  the acquisition by a consortium of private equity firms (OakHill Capital Partners, GenNx360 Capital Partners, and Knox Lawrence International) of Vertex Outsourcing, which has an ARM utility-focused division, First Revenue Assurance; and Black Tip Capital Holdings’ takeover of debt purchaser Marlin Capital Europe, as well as its sister debt collection company, Marlin Financial Services Ltd.

Despite Nikko’s acquisitions of Cabot and Clarity this year, at least one industry insider says that in the UK debt purchasing arena, investors are focusing more on purchasing portfolios rather than buying up existing firms. There’s been a change in debt purchasing, according to Kevin Fuller, Director of Marketing, Advisory and Analytics at TDX Group, a Nottingham-based debt sale brokerage, which also manages a network of collection agencies. “We’re seeing pure investors with zero operational capacity in the UK – firms like U.S. debt purchaser Arrow Financial, which is purely a funder in the UK, as well as investment banks and funds – are buying portfolios outright and using a panel of collection firms to service the debt,” he says. In 2007, Fuller expects this approach to account for a major share, or close to it, of debt purchasing. Some investment firms, he notes, are taking the same model to the continent. Debt purchasers with a platform need to keep acquiring debt to feed the servicing platform, he points out. Those without such a fixed cost can be more selective. “There’s a growing preference,” he says, “to be more nimble.”

“A number of established UK collection agencies are evaluating their go-forward business plan, evaluating the option of going public,” Fuller adds. The Daily Telegraph recently reported that Equidebt is weighing the option to sell or float an IPO. “My guess is it’s symptomatic,” Fuller says. “There are not a huge number of potential buyers — financial or strategic. Yet debt is a challenge for big banks, so there’s an appetite to acquire a stake in debt management companies.”

Indeed, according to the Financial Services Authority, debt levels in the UK have risen to 140 percent of income. A lot of that debt is unsecured, an indication that there will be no lack of debts to collect or service any time soon. “With the dramatic increase in consumer credit, the UK is probably the hottest market,” says Jason Spaeth, head of the London office of Varde Partners, a Minneapolis-based alternative investment firm active in the consumer debt market. “It’s drawing interest from the U.S. and Europe.”

The United States

Several U.S.-based ARM firms have been the target of foreign buyers. In addition to the 2006 acquisition of New Jersey-based Armanti Financial Services by the Indian firm of Apollo Health Street, HOV Services Ltd., an Indian business process outsourcing (BPO) company, bought LASON, a Michigan-based ARM, BPO, and healthcare services outsourcer. The Israeli firm IDT Carmel bought Minneapolis-based People First Recoveries, and a division of the National Bank of Canada took a majority position in U.S. debt buyer Credigy Solutions Inc. On the commercial front, Coface Collections North America, a division of the French commercial credit rating, insurance, and receivables management firm, bought the commercial debt collection firm of Newton & Associates. In January 2007, Euler Hermes, another international commercial credit insurer headquartered in Paris, announced that its North American division bought the Kentucky commercial debt collection firm of United Mercantile Agencies.

Although the majority of M&A deals in the U.S. are not cross-border transactions, when the dollar is weak, Ginsberg notes, such deals become more attractive.

North of the Border

The relatively low value of the dollar also has had an impact on the attractiveness of the Canadian market to U.S. players. “Up to a year ago, there was a lot of American interest up here,” says Jonathan R. Finley, President of Credit Bureau of Canada. “Now it’s not as endearing.”

Still, a year and a half ago Canada had allure for at least one major European player. Aktiv Kapital, with offices in more than a dozen countries, acquired the debt purchasing firm Portfolio Management Group – its first step outside of continental Europe and the UK.  “We were looking to capital or equity markets for assistance with growth,” says Andy Szemenyei, who was one of the firm’s owners and now heads the Canadian operation. “Aktiv, looking to be more of a global player, saw an opportunity in Canada that fit with its long-term strategy.” Since then the firm grew by 20 percent to 25 percent in 2006, Szemenyei reports. He attributes that spurt to the ability to fund transactions at a favorable rate and to deal at a higher level. “Sellers are more confident that transactions can be completed with relative ease,” he says. To foster relationships with financial institutions, the firm is growing the contingency side of the business. For future growth, Szemenyei says, PMG is looking at organic expansion, potential acquisition, and outsourcing to other agencies in Canada or offshore. So far, PMG has purchased only Canadian debt. From Canada, could Aktiv’s next move be into the U.S.? That’s a question to which Szemenyei says he doesn’t have the answer.

The Canadian contingency collection market is mature, about 1/10 the size of the U.S., and dominated by half a dozen well-established players, Ginsberg says. Debt purchasing is still relatively small in Canada as the large issuers for the most part are not yet selling. “Growth for Canadian agencies,” he adds, “will come from stealing market share on the contingency side from competitors, the opening up of the debt sales market, or by expanding into the U.S.”

South of the Border

NCO, with its Panamanian acquisition, is not the only player to make a recent purchase in the region. Mexico holds promise for industry veteran Juan Blanco, president of International Risk Management in Las Vegas. In December, the former West Asset Management executive and co-founder of National Asset Management announced he had acquired West’s call center in Guadalajara, Mexico – a center he established several years ago. Why would West want to sell? “I think it was a small operation for them,” Blanco says. “They have operations in Jamaica, the Philippines, and India.” According to Tye Hanna, an industry consultant and former executive vice president of West Asset Management, the center was a small legacy operation West inherited when it acquired Worldwide Asset Management. The center handled some call-backs to Spanish speakers in the U.S., but was used mainly to service debt Worldwide purchased in Mexico, a market that has since become intensely competitive. Blanco says he wants to refocus the operation on inbound calls to Spanish- and English-speaking Hispanics in the U.S. Many Americans of Mexican descent speak no Spanish, he points out. For that reason the employees he hires are bilingual. With Hispanics the fastest growing segment of the U.S. population, Blanco sees a huge potential. In the past, the service was only used internally, but Blanco is now marketing it to creditors and debt buyers alike.

The overall call center business in Latin America is growing phenomenally, says Phillip Peters, CEO of Zagada Markets, a boutique business development and analytics firm. According to Peters, in the Caribbean the annual center growth rate is about 100 percent; in Central America, between 30 percent and 35 percent; in Argentina and Mexico, 25-28 percent and 17 percent respectively. Growth, he says, is coming from centers expanding their capacity and new centers being established.

For call-backs to the U.S., Hanna points out, near-shore locales like the Caribbean have the advantage of lower cost centers that are not too far away. However, there’s not a lot of consumer credit there, he points out, and consequently not a lot of demand for in-country calling.

Australia and Asia

The Australian market has seen a bit of what insiders call “rationalization,” including domestic M&A transactions and sales of partial holdings this past year. Credit Corp acquired Pioneer Credit Management Services; Repcol acquired debt buyer Javelin; and Trans Tasman Collection, with backing from investment partners, took over Baycorp Advantage Collection Services. Trans Tasman also boosted its stake in Collection House to more than 10 percent by acquiring shares from co-founder John Pearce days after another co-founder sold more than 6.75 million shares. In February, Collection House also divested itself of non-core asset Rapid Ratings to Howland Partners, a U.S. merchant banking firm.

A significant cross-border ARM deal also occurred. U.S.-based NCO Group, the world’s largest ARM firm, moved decisively into the Australian market with its purchase of a 75 percent stake in Australian Receivables last summer followed by the add-on of Statewide Mercantile Services announced in January of this year. Subsequent debt purchases and the landing of a major forward flow contract cemented its position in the market.

Will other U.S. firms follow? “There’s no hurdle, but it’s an issue of scale,” says Paul J. Cooney, Managing Director of Australian Receivables and a 35-year industry veteran. The market is relatively small – a population of approximately 20 million, plus another 3 million in New Zealand. “There’s an opportunity for some synergies, but it depends on their appetite. It’s more of a strategic opportunity,” he adds. “Time zones and travel time are important. For Asia, it’s a good geographic fit.”

What prompted Cooney to sell a majority stake in the firm he had started just three years earlier?  He wanted to grow the business, and he wanted to be focused on clients, not shareholders and capital markets. To attract large corporate clients in Australia, he needed to offer scale and a global network.

When he approached NCO, he had what he describes as a reasonably sized, profitable operation with good growth prospects – one that could fill a gap in their global operations. Also, he was a known entity, having acted as NCO’s agent in Australia for eight years.  

For additional growth, Asia is an area of interest, Cooney says. North American creditors have extensive operations there, he points out. There’s a need for services on the ground where clients are primarily in the servicing end of the cycle – CRM and first party work.  The challenge: “You have to have not just the collections but the legal and social or cultural infrastructure,” he acknowledges. “Collections there is so different. It has little in common with Western collections.”

To be successful, you need to acquire or have a trustworthy local partner there, agrees Peter D. Doherty, ledger analyst for Repcol. “In addition to culture and language,” he says, “there are currency issues and even differences with configuration of the collection systems.”

Acquisition is providing an entrée for one leading Australian firm. In January, Credit Corp Group stepped foot into the Malaysian debt market with the acquisition of Pioneer Credit Malaysia – but only after what the company described as an extensive period of due diligence of the operation and the prospects for consumer debt management there.  “This will give Credit Corp a local presence and market experience…in a market which shares a very similar legal framework and [is] expected to follow the receivables management market trends evidenced in Australia over recent years,” Managing Director Geoffrey Lucas said in announcing the deal.

What’s the outlook for the Australian market? “I think in the next five years we’ll see a lot of excitement – continued rationalization, midsize agencies getting larger, and more debt sold – by new sellers and more by existing ones,” says Repcol’s Doherty.

Developing Opportunities

Neil A. Wood is Group Managing Director for Melbourne-based Global Credit Solutions Ltd. Global Credit offers credit management, debt collection, credit reporting, and risk management services in more than 70 countries – in Asia, Africa, Europe, the Middle East and the Americas. His operation has a financial interest in firms in eight countries and has established a network of carefully vetted local partner agencies in the rest.

His take on the best opportunity in emerging markets? “You have to look at a market’s stability, both economic and political,” he says. The legal system matters, too.  In Hong Kong, Singapore and Malaysia, the laws are very much based on British administrative systems, he points out. However, he notes, mainland China is very different. Southeast Asia and Asia are huge potential markets, he acknowledges. “But if you rely on what worked in the U.S. or Europe,” Wood says, “you’ll get bitten.”

 Likewise in Africa, in former French and British colonies, the administrative procedure is established, he adds. In the Middle East, in the United Arab Emirates and especially Dubai, there is a lot of potential. More dollars are spent on infrastructure and development than anywhere, Wood says. “But for Western debt collection companies, there’s a danger of risking capital investment,” he says. “There are cultural issues and language issues, as well as political and religious ones.

M&A Outlook

“We’re likely to see continued growth in M&A in Europe this year,” Wood predicts. “The cross-border activity is capitalizing on the European Union, which in many ways is becoming the United States of Europe.”

Still, obtaining bank financing may be more challenging. Although 60 percent of respondents to a recent IMAP transaction survey reported that access to bank financing in Europe was easier in 2006 than in 2005, 30 percent indicate they expect it to be more difficult this year, while 55 percent expect it to be about the same and only 15 percent expect it to be easier. As for North America, although 65 percent expect bank financing to be the same and 9 percent expect it to be easier to obtain, 26 percent say it’s likely to be somewhat or substantially more difficult to arrange.

As for the attraction of near-shore collection operations, Ginsberg says: “We’ve seen a lot of interest in near-shore M&A. Some firms that expanded there organically have matured and are solid enough to attract interest.”

At the moment Asia poses special challenges. “It’s a problem for companies like those in the United States and Germany that base their approach on a budget-driven model and want to amortize their costs over a three-year period,” Wood says. “Smart players consider amortizing over a longer period. The rewards are greater in such huge potential markets.”

Southeast Asia is a long-term play, agrees Ginsberg. “A small acquisition can provide a presence, but growth in scale will come over time. The patient buyer stands to see a greater return for the dollars spent.”

Merger and acquisition activity tends to come in waves. “After almost four strong years, the fundamentals are in place for M&A activity to continue at this pace in 2007,” Ginsberg says. “There’s no slowdown in sight.” The availability of financing alternatives for the buyer, he notes, as well as strong price and deal structures for the seller, create a favorable environment.

That bodes well for international and cross-border M&A as well. “Now more than ever, buyers are looking outside their borders for acquisition opportunities,” Ginsberg observes. “They are seeing growth opportunities and want to capitalize on them through M&A.”

About the Author
Kit Ladwig, an experienced business writer and former editor of Collections & Credit Risk magazine, has been writing about the credit and collection industries for the past 10 years.

This article was written specially for Kaulkin Ginsberg Company, a strategic advisory firm focused on the ARM industry.  More can be found at www.kaulkin.com.