News

ISO consolidation continues in Australia

June 22, 2003

SYDNEY -- The independent ATM industry is in the midst of a major consolidation phase, according to a report in The Age.

On the heels of last week's sale of Brighton-based ATM Solutions to Bank of Queensland (See related story Aussie bank buys out top ATM ISO), Windsor-based Direct Cash has agreed to sell its business to Sydney-based Cashcard, the country's largest ATM operator, for more than $30 million.

The Direct Cash sale includes a small component of assumed bank debt, and is expected to take effect from July 1. Greg Baker, managing director of Cashcard, confirmed negotiations to buy Direct Cash, but said no agreement had been signed, according to the Age.

In the ATM Solutions sale, a component of the purchase price is subject to future performance of the business.

Just a few years ago, ATMs were found only at bank branches in Australia. Now, however, they are a common sight at pubs, service stations, convenience stores, chemists and take-away food outlets.

A number of entrepreneurs spotted a growing gap in the market as banks closed branches and merchants realized the business potential of making cash available to their customers.

Direct Cash, founded in 1999, got its break as a supplier of ATMs to 7-Eleven convenience stores and later to some Coles supermarkets. ATM Solutions, formed in 2001, targeted pubs, clubs and service stations.

The companies deploy lower-end, less expensive hardware than the banks. As in the United States, many merchants are happy to fill the ATM from their cash registers rather than the more expensive option of having a cash courier fill the machine.

In recent years, the more efficient non-bank ATM operators have mopped up rivals that managed a few dozen or a few hundred machines.(See related story ISO market continues to consolidate in Oz)

The largest of these, Electronic Banking Systems (EBS), with 2,200 ATMs, was run by former photocopier salesman Ken Gaunt. In late 2002, Gaunt and fellow investors -- including Gresham Private Equity -- sold EBS to Cashcard for $32 million in cash and shares, in a transaction that underscored the value created by the apparently simple business of putting ATMs in retail locations.

(See related story Australia's Cashcard grows with purchase of EBS)

Cashcard's purchase of EBS appears to have been the catalyst for the latest takeovers of Direct Cash and ATM Solutions, and has set a benchmark for valuing the sector, according to the Age.

Cashcard is the dominant ATM player. After its purchase of the 850 to 900 machines owned by Direct Cash, Cashcard will own more than 6,000 machines -- more than twice the number owned by any bank.

The other major players are ATM Solutions, with about 1,200 machines, and Pulse International, a Sydney-based transactions processor with relationships with owners of about 1,500 ATMs.

Early investors in the ATM sector will soon be sharing the spoils.

Investors in Direct Cash include Greg Hargrave, the chief operating officer of labor hire company Skilled; Adrian Field and Russell Small, both former Skilled executives; and Caulfield lawyer Maurice Spicer..

Investors in ATM Solutions include the joint managing directors, Tim Wildash and Mervyn Kark, as well as a South African-based company, also known as ATM Solutions, with ties to Kark.

Wildash, who will remain managing director of ATM Solutions under the Bank of Queensland's control, said the ATM sector continues to grow.

According to Wildash, companies like ATM Solutions grew quickly because the banks were not providing enough ATMs.

"Based on international comparisons, we saw room for 25,000 ATMS in Australia, and there were only 11,000 of them in 2000," he said.

There are now more than 19,000 ATMs.

"We also saw many strategic advantages of taking costs out of the chain, which enabled merchants to operate an ATM at a profit, for example, by taking out the need for cash services, and having the merchant fill the machine," he said.

And with the banks expected to introduce a new fee regime for ATMs next year, under which they will drop foreign ATM fees and the ATM owners will be free to set their own fees, Wildash predicts on-site ATMs will become profitable for many more small businesses. (See related story Australia waits for interchange reform)

"With surcharging, it will be profitable for a busy restaurant or pharmacy or newsagent to have an ATM, because at 300 transactions a month, the merchant will make a profit," Wildash said.

Consolidation in the ATM sector may not guarantee super profits to the vendors, however. Cashcard's purchase of EBS in late 2002 appears to have failed to meet the previous owners' targets, according to the Age report.

On top of the purchase price of $32 million in cash and shares, the vendors of EBS were counting on a further performance payment, of up to $14 million, due next month, under an earn-out clause. Former EBS shareholders have been told not to expect any payment under the earn-out agreement.