TTR Dealmaker Q&A
Cielo forms JV with BB Elo
Q: How did this JV originate and to what end?
A: Banco do Brasil has been increasingly doing this sort of partnership to have the ability to run companies more like private companies do. It’s what happened in insurance with Mapfre and with Votorantim in investment banking. As a state-held company, Banco do Brasil has very strict protocols when contracting services; it’s a complicated process and takes a long time. It’s very natural that it would look for this type of partnership in the credit card business as well. For BB Elo, it allows it to manage the issuing business in a more private-like environment, and for Cielo it adds a complementary line of business to its other services.
“For BB Elo, it allows it to manage the issuing business in a more private-like environment, and for Cielo it adds a complementary line of business”
Q: At what stage was Lefosse retained?
A: We first started working on the transaction in March, 2014. The negotiations kind of stopped in mid-May-June for commercial reasons, and resumed around November. A lot of the economic terms had been defined, they were pretty advanced prior to our involvement.
Q: Why was Lefosse selected for the mandate?
A: It’s a very strategic deal in a very particular industry; the credit card business is very complicated. There are not many lawyers with expertise in this segment – I happen to be one of them. I did the IPOs of all the credit card acquirers and was contacted directly; there was no beauty contest. I did Cielo’s joint venture with American Express; I did its IPO and bond issuance. These were two listed entities, this was right up my ally. We were co-counsel in the transaction alongside a team from Barbosa, Müssnich & Aragão led by Francisco Müssnich.
Q: What was unique about this transaction?
A: This was a deal that was made possible because of changes in the Brazilian industry with the implementation of new regulation. The credit card industry was unregulated until last year. The new regulation made the interconnections between the different actors more clear – it gave Banco do Brasil the framework to form this joint venture. It’s a highly new deal into a recently regulated industry.
Q: What brought about the new regulation?
A: The Central Bank wants to have supervisory authority over all the systems of payment. The credit card industry as an unregulated business is something they were looking into, to set the parameters, from a supervisory and financial health viewpoint. On doing that, they created the opportunity for certain banks like Banco do Brasil. The Central Bank had been reviewing, studying and analyzing the credit card industry for about 10 years. Credit card issuers will now be subject to similar oversight as banks, with minimal capital requirements, submission of monthly balance sheets to the Central Bank which may audit, request additional information or a capital increase. At the end of the day its better for the consumer and the merchants to be more secure and connected to the banking industry. It’s just a natural development following the Central Bank’s creation of the Brazilian Payment System over 10 years ago.
Q: What other transactions could this deal precipitate?
A: I think the expectation is that other banks will join this joint venture. It may be easier for banks to join the JV rather than pursue similar deals on their own, depending on the scale of the business. It could be onerous for each bank to maintain the complicated structure independently, depending on which cards they issue.