Sticky merchant fees attract Wright to ReD

The fuel card and pre-paid card businesses of Retail Decisions in Australia will be sold to US payment processor Wright Express. Wright and ReD's UK-based owner Palamon Capital Partners announced the sale on Friday.

Wright said it will pay A$353 million for the ReD business. Settlement is likely in mid September.

The sale price of the Australian subsidiary of Retail Decisions is an attractive one for the vendors. Palamon paid a little less than £200 million for ReD in 2006, alongside a couple of other private equity investors. It retains a portfolio of other ReD business in Europe and China following this sale.

The businesses sold generated revenue of $61 million in 2009, Wright said. EBITDA was $35 million.

Palamon is not selling its fraud prevention business in Australia.

Wright has been buying up similar businesses in international markets to complement its domestic business.

Michael Dubyak, chairman and chief executive of Wright Express, told a conference call on Friday night that margins in the Australian business were better than in its home market and this justified the price paid.

This rationale might catch the attention of oil companies and operators of independent service station networks, which have not experienced much reduction in the merchant fees paid on the firm's fuel cards in comparison to the cuts over the last six or seven years in fees paid to American Express or Diners Club, or to banks for acceptance of MasterCard and Visa.

ReD's fuel cards in Australia - primarily Motorcharge, Motorpass and fleet cards - cater to 270,000 business and private users. The cards are accepted at around 90 per cent of service stations.

Dubyak said Wright planned to extend the penetration of the card and mentioned an additional target market of 900,000 businesses, so including practically any small business with a car, van or truck and without a dedicated fuel payment card.

Dubyak said that ReD is also the leader in the pre-paid and largely gift card market in Australia with a market share of 60 per cent, servicing 120 retailers across 220 card programs. He said in practice ReD catered to 85 per cent of the addressable market.

ReD's local management will remain with the business.