Executives
Roberto Egydio Setubal – CEO
Analysts
Mario Pierry – Deutsche Bank
Boris Molina – Santander
Paulo Ribeiro – HSBC
Paulo Passoni – Third Point
Drew Figdor – Tiedemann & Co.
Carlos Macedo – Goldman Sachs
Jose Barria – Bank of America
Itau Unibanco Holding S.A. (ITUB) Redecard’s Public Tender Offer Call April 16, 2012 9:00 AM ET
Operator
Good morning ladies and gentlemen, thank you for standing by.
This is Itaú Unibanco Holding conference call about Redecard’s Public Offering. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions to participate will be given at that time.
(Operator Instructions)
As a reminder, this conference is being recorded and broadcast live on www.itau-unibanco.com/ir. A slide presentation is also available on the site.
Before proceeding let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.
With us today in this conference call in São Paulo are Roberto Egydio Setubal, CEO; Alfredo Egydio Setubal, Executive Vice President and Investor Relations Officer; and Rogério Calderón, Corporate Controller and Head of Investor Relations.
It is now my pleasure to turn the call to Mr. Setubal. Please sir, go ahead.
Roberto Egydio Setubal
Good morning and good afternoon for all of you. It is a pleasure for us to be here and to have the opportunity to talk with you and exchange ideas about this offer on Redecard.
I would like to start saying that we confirm, as announced, the price of 35 reais per share which is inside the range that Rothschild appraised, so we basically confirm our previous announcement on price; but we changed an important condition on the offer which is the fact that we will only go through as long as we have two thirds of the free float shareholders registered in the offer agreeing with our offer.
And we decided if we do not achieve this level of agreement among shareholders registered, we will keep the company in the Novo Mercado situation. This decision I think is an important decision and basically the decision among the requirement of many shareholders of Redecard to us that they would like to see Redecard staying in the Novo Mercado if we are not fully successful in our offer.
I would like to exchange with you some of the views on the acquiring business and Redecard in particular, which are very important because especially here in Brazil I believe that many people do not understand exactly the fundamentals and the forces that move the pieces. As you know until the ‘80s Redecard did not exist; Credicard was a company that issued cards and had the acquiring powers in Brazil, the exclusivity already at that time. In ‘95, ‘97, Credicard was divided in three companies: Redecard itself, as we know, which was the acquiring business; Credicard, which was the issuer; and Orbital, the processor. The three businesses from then on started to move isolated although the shareholders of the three were the same.
Redecard held the exclusivity for the MasterCard brand and this was an important competitive advantage that Redecard had throughout that period until last year (inaudible) 2010 when this was not anymore allowed in Brazil. So Redecard had this exclusivity on MasterCard brand and that made it for Redecard very easy to affiliate commerce and stores that were interested in doing business with Credicard, MasterCard holders. This was a very important thing and as long as you had in the market MasterCard cards issued Redecard would have a very solid business.
So at that time the business was about making the banks issuing MasterCard brand cards. This was the main objective of Redecard and having the cards on the market, the stores and the commerce in general would be very interested in having the cards accepted there and so it would be very easy to Redecard to affiliate those cards.
In this environment for sure Redecard had a very strong pricing power because of the exclusivity; but then the company went to an IPO in July 2007 under these market conditions and by the way at that time a lot of comments were made during the offer about the risk of those things changing in the future. At the IPO itself, MasterCard sold its total stake in Redecard. In November 2008 or a little bit more than one year after the IPO, Itaú and Unibanco announced the merger. And in March 2009 Citi decided to sell its stake in Redecard and Itaú Unibanco decided to acquire only 6% of those in order to achieve the controlling shareholder – to be the controlling shareholder of Redecard.
In July 2010, the end of the exclusivity was announced and so Redecard lost its exclusivity on the acquiring business of MasterCard brand which was not anymore exclusive of Redecard and this changed completely the business of acquiring because from then on merchants had the alternative of affiliating to different acquiring companies because any company could offer the MasterCard acquiring service and Redecard lost its exclusivity in the pricing power and, I would say, it lost at that moment the most valuable asset that it had and banks themselves could affiliate different acquiring companies for their clients.
These events, I would say, redefined the balance of power within the value chain of the acquiring business. The power moved in part from the acquiring, which previously had the exclusivity on the brands – Redecard and one side, Cielo in the other side – it moved a little bit towards the banks that could, because of their relationship with the merchants in general, because of the offer of credit and other services, they had also the capacity to move the acquiring business from one acquiring company to the other because of this relationship that they have with the merchants in general.
So this is very important to understand that this end of the exclusivity changed completely the value chain and how the market will work from then on and in the future. I say in the future because today if we look around we do not see already that many companies coming into the market so far – and so far it’s very important and there is a reason for that. The reason basically is that in order to establish the infrastructure that is needed to develop this business, it takes from 18 to 24 months. So we do not have so far time enough to have other companies coming to the market and offering competitive services for the acquiring business, although we have already had many companies announcing that they will come to Brazil and they will be a player in our market.
Although I do not believe that any company that will come to the market in Brazil can be successful without being strongly associated with a strong retail bank. I think this partnership, this kind of association could be very important for anybody – and this again shows the importance and the power of the banks in the value chain.
I believe that because of this new commerce, new coming companies into the market, there will be additional pressure on margins and increase in competition. By the way, Itaú Unibanco itself has a company, which is called Hipercard, I believe that many of you have already heard about – it’s a company that has more or less 5% of market share of issuers and another 5% (inaudible) 5% of market share on the acquiring business.
So far – and this company already existed at the time of the IPO and we really also mentioned the existence, Unibanco at that time mentioned the existence of that company and the possible conflicts that might arise because of that situation. And this company so far, because we have already so far avoided any kind of competition of this company with Redecard, it basically acquires Hipercard cards. They do not acquire – although they could – MasterCard or Visa.
I believe we will keep on growing in the future. I think there is a lot of business to be done through the acquiring – although margins clearly will be under pressure and will decrease. And in this kind of business scale matters a lot, you have to be big in order to be competitive. And as I mentioned the partnership with banks will be increasingly important.
So in order to avoid a commoditization of the product, acquirers, in my view, will have to develop additional services and additional products in order to have their products with differentiation in order to – in comparison to other acquirers. And in this process, I believe that the partnership with banks will be crucial in order to develop different products. In this environment, I believe that the current levels of returns will be unsustainable.
I would like to touch with you now on page 6 about some potential conflicts between Redecard and Itaú Unibanco at this moment. The first one is the commercial agreement, which we have been talking already, we already mentioned that in our offering and about the commercial agreement is what is the value that Itaú Unibanco brings to the company and how should we have been remunerated on our service and the value within the company. By the way it is important to mention that the more recent agreements of Redecard with other banks have better conditions than the ones at that Itaú Unibanco has itself with the company. This is due to the fact that, as I mentioned, the value chain has changed. So it is natural that the company negotiates different agreements with different banks in order to have, take into account the contribution that the banks bring.
This is very important to understand because as I mentioned before the end of the exclusivity, this really was not necessary because Redecard itself had the business under full control, which is not true anymore today because of the open competition environment that we are living on. So the support of and the partnership in association with banks is getting much, much, much more important.
Another potential conflict is the development of new products and services that we can do either in Redecard or in other ways, in banking ways, all of these different conflicts that we have today. Also we can offer combos to clients of Redecard in order to increase the value that we offer to the clients, and this would combine Redecard’s services with banking services. This makes it much more competitive and again we have a potential conflict of how to price this and how to share the revenues.
Hipercard, as I have already mentioned, is another potential conflict that exists that so far has not been mentioned or touched.
Another issue is about the capital that Redecard today has. Redecard today has a very small amount of capital if you take into account the financial volumes of the company; it is much below, for instance, the level of capital that Basel I requires, just to give you an idea.
Another comment that I would like to make is a big retailer – one of the biggest retailers in Brazil, which is an international company, came to us to mention and to understand how we saw Redecard because they said that Redecard was the highest risk that they have all over the world, so this was a big risk and the company itself, looking as a standalone basis, would not really be able to – would not be a accessible to have the level of risk that they were taking on Redecard. So they understood that Itaú itself was behind the company guaranteeing the company for all the clients, which was true but to that extent we were not really been remunerated by the capital that basically we are allocating into the company in order to have the company in a safe situation. By the way it is very clear, out of the comments of this retailer that if Redecard was a standalone business and to be a contractual relation, it would have much more capital than it carries today.
Another point of conflict is the fact that there is a lot of competition going on in the market between banks and those companies, the acquiring companies, on the discounting and the financing of the receivables on Redecard. This is a difficult situation for us, between us and Redecard and we have been avoiding to be very aggressive on the Redecard basis because there is this conflict. On the other hand although this is the situation, we have not been very aggressive, other companies have been – other banks have been very aggressive in the market and Redecard itself has been losing share and losing share every year in that kind of service.
Another issue that is very important and it is a peculiarity of the Brazilian market is the interchange rate on installments without interest. This is a product that we have in Brazil where merchants offer the clients to pay the acquisitions in many installments and there will be no interest in that purchase and the bank itself is the one that is assuming the risk of the card not performing. And to remunerate the risk that the bank has today carrying, we have basically on average 20 basis points of interchange, which clearly does not remunerate the issue of risk. So this is a discussion that’s going on today with MasterCard, Visa, banks and acquiring companies and this clearly will have to be revised in the future and probably this will reduce partially the margin of the acquiring in order to remunerate the issuer accordingly.
So going forward mainly Redecard will be more – there will be more and more conflicts for Itaú Unibanco. So this is an important reason why we have adopted, why we have been making this offer at this point in time and we are making the offer based on the current conditions and not taking into account everything that I mentioned above. We believe that this is the best way to do because we took the company to the market in a different situation and we want to avoid those conflicts. We have to make an offer before we start moving ourselves in the direction that would be interesting for the shareholders of the bank.
So going to page 7, I think that our offer clearly is correlated with this different market situation and aligning the acquiring business with this market environment today is important for us and we believe that for us it will be very important to have the full integration of this business in order to avoid the potential conflicts of interests.
It is very important to say that we have been trying to be the most transparent in our intention as possibly we can be. We are not really – we do not have any intention of trapping anybody. But we believe that it is very, very important for everybody to understand clearly the alternatives that the bank has and also the potential conflict that the bank has two avoid. So we have been very clear in saying that we would like to renegotiate our relation with Redecard that we are pricing it before this change. And if we are not successful in anything at the end either in the acquisition or the renegotiation, we believe that we will have to analyze deeply the alternatives of developing the acquiring business as other banks have already made.
On page 8 it’s very clear if we see the evolution of the share price where the share price stands today. It’s the highest share price ever, although the market is not at its highest point. So we believe that this is a very fair price.
The final considerations on page 9, I would like to remember that the current return of Redecard is very high and it is high due to those reasons in the market that we have for many, many years. But I don’t believe that it’s sustainable to have 100% return on shareholders’ equity or the price of the share could be 20 times the book value. This is not something sustainable, I do not think there is any other business in the world that has these kinds of returns and this will change given the fact that we will have new entrants in the market given the fact that banks will renegotiate their condition in this chain value.
We also would like to remember that we are basically pricing the offer at a fair price as already corroborated by Rothschild. The returns are very high and we are doing our offer on the current conditions.
It is very important to us that we have not done also an opportunistic offer. We waited till the market had a balanced repricing after the end of the exclusivity in order to make our offer. But at some point they would have to make it because we were already feeling all those problems, the conflicts that I tried to explain before.
On page 10, we have the ending page on this screen. We have the timetable that we expect to have the auction, which probably will, I mean after everything goes through, all the possibilities, it can probably be in July or August.
I think those were the explanations that we have to give you and again we are open to your questions and we will try to answer the questions as much clearly as we can. Thank you.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Mr. Mario Pierry from Deutsche Bank.
Mario Pierry – Deutsche Bank
Hello Roberto, hi everybody. Let me ask you two questions. You mentioned here that the Redecard’s minorities can still ask for another appraisal report. I was wondering if this appraisal report could have any impact on your final offer price.
And then the second question is with regards to what you believe is the sustainable margin of this business. You spent a lot of time saying you see a lot of risks. If Redecard stays as a standalone company, what do you think would be a sustainable margin for the business? Thank you.
Roberto Egydio Setubal
Okay, Mario, thank you for your questions.
We do not consider at all change in the price, this is number one; number two, where the margins could go, it can go a long way down before it is stabilized. It will really depend a little bit on market players and how the market will rearrange. I believe that we will have probably four, five big players in the final and probably it will be reducing over time and probably at some point in time it will achieve the reasonable level of return that a company like this could have.
Mario Pierry – Deutsche Bank
Okay, so just let me understand then. If we do get another appraisal report and the price of this appraisal report comes above the 35 reais, you wouldn’t be willing to change your final offer price, correct?
Roberto Egydio Setubal
That’s correct.
Operator
Our next question comes from Mr. Boris Molina from Santander.
Boris Molina – Santander
Good morning, thank you very much for taking my call. I have a couple of questions, let me start with the first one. Let’s assume Itaú is successful and you get two thirds of the minority standard on your shares and you delist the company and the company becomes, let’s say, a fully-owned subsidiary of Itaú. Is there any legal or regulatory or tax regulation that would stop Itaú from transferring through this renegotiation process or conditions between Itaú and Redecard transferring fully the profitability of Redecard into Itaú?
I mentioned this because this would be a way to maximize shareholder value for Itaú because once this profitability falls beyond, probably the one that would be the ongoing profitability of Redecard if it remains independent, it would allow the bank to, through an impairment test, write off most if not all of the goodwill associated with this acquisition. So I just want to understand in this first question if there is something that could stop you from doing that from the point of view of regulation or legal tax regulation of Brazil or something like that.
Roberto Egydio Setubal
We are not considering to terminate the company. We believe that we need the company in order to be present in the market and to be more active. We believe also that we have, let’s say, legal limits about pricing, for instance, between companies, because we have to keep it in the market level in order to – otherwise we would have a lot of tax problems for instance. So this has to be done in market conditions. I think basically this is, I believe I answered your question.
Boris Molina – Santander
Okay, excellent. Now my second question is regarding the alternative scenario. Let’s suppose that for some reason or other the tender offer is not successful and as you mentioned you won’t increase the price and Redecard remains as a standalone entity. You mentioned that you would probably consider if somehow the renegotiation process with Redecard of this contractual relationship is not satisfactory you would consider selling or I don’t know, probably spinning off the company.
Now as you mentioned, the value of the acquiring business needs a strong bank in order for a company to be successful. So I am wondering how you are going to manage the conflict that would arise from still being a controller of the company or ceasing to be a controller of the company and the risk that would entail for Itaú if you sell or spin off the company from the possibility that Itaú would – that Redecard would start to be free to pursue shareholder value maximization for Redecard’s shareholders.
This would mean there are many banks that are trying to enter into the acquiring business or even the SME business in Brazil that would love to have access to Redecard’s client basis and it includes a large chunk, I would suppose, of the client base of Itaú. So it doesn’t seem likely a feasible option to open Redecard to get in association with, I don’t know, Citi, HSBC and banks that want to enter into this business and have access to your client base.
So is it possible for you to spin off or partially sell your stake in Redecard and eliminate this risk for your franchise?
Roberto Egydio Setubal
Okay, first clearly, if we take this action in the future, we will reduce our shareholding in Redecard, we would not be more the controlling in exercise of the company. The company I imagine that will have to reorganize its governance as a more independent company and over time in my mind this has to be discussed. This is a first reaction idea. We would not exercise the controlling portion that we have today. We would still be a shareholder because I do not think it would be possible to sell all the shares at once, but over time we would be divesting from the company. This is very clear in our mind.
We believe that today as long as we have the infrastructure and the potential – all the services that Redecard offers today, which basically is acquiring different card brands. And as I mentioned in the presentation, this might take 18 to 24 months, we believe that the relationship that the bank has with the merchants is stronger than the relationship that the acquiring business has with the merchants. So the driver of this thing would be the bank’s relationship with the merchants because we have much more products to offer to the merchants, much more – and credit as well. So I think that at the end of the day this business will be over time more and more and more bank related.
I mentioned in the presentation that Credicard at some point in time was a company that used to have the license of MasterCard alone both for issuing and for acquiring. By the time they had the license, the exclusivity to issue MasterCard cards, they used to have like 60%, 65% market share and over time banks took over that business and today Credicard has something around 10%.
I am not saying that this is what’s going to happen but what I am saying is that banks because of the relationship that they have with clients, they have a strong position in order to move clients from one into the other acquirer because basically the service desk acquirers provide is something that banks can replicate and can do themselves.
So we believe that at least the level of market share that we have today, the market share as a bank that we have today with clients in the market is a fair share that we would over time achieved in the acquiring business if we have to go alone one day.
Boris Molina – Santander
Okay. So you do consider that in the new governance structure Redecard would be free to pursue a strategic alliance with a competing bank and that it would try, with a new banking relationship they could try to gain market share against you?
Roberto Egydio Setubal
Yes, that is correct.
Operator
Our next question comes from Mr. Paulo Ribeiro from HSBC.
Paulo Ribeiro – HSBC
Good morning. Just quickly to Boris’ previous question, it tends to be a little bit complicated for me. You are saying that acquiring is going to be a banking business at the end of the day and yet you say their competitors they are going to be able to enter the market and there are that many relevant banks out there, Elavon and Citi and Santander are already doing it and the rest already have agreements. So if it’s’ going to be a banking business, how is competition going to really increase here? That’s the first question.
The second is how would you deal with the banks that now have a relationship with Redecard? Do you think they would have a problem with all their information, all their clients being inside Itaú?
Roberto Egydio Setubal
Could you repeat the last question?
Paulo Ribeiro – HSBC
Yes. Do you think there is a – by bringing Redecard inside, could you create a conflict of interests for other banks, you know Caixa or Safra that currently have an agreement with Redecard? I mean how comfortable would it be in having dealing, opening their client base and everything to a company that’s owned by Itaú?
Roberto Egydio Setubal
Okay. Regarding this question, today the market works in a way that banks work with the current two major acquiring companies we have the market. For instance in the case of Itaú, we have not a small portion of the business of Cielo here inside the bank, as we have the controlling banks of Cielo also having some business of MasterCard. So this is not really an issue in this new environment of the bank.
What I am saying is that basically when I say all those issues about the way the market will develop, basically the market in Brazil will be much, over time, more and more and more similar to what we have around the world. This is not something that should be that strange, which means that this business over time will grow into a more cost plus type of business, efficiency, scale, all those things will be more and more important over time, and a partnership with banks will be also crucial. I don’t believe that any new entrant in the market would be able to be successful in the large scale without having a strong retail bank supporting and associated with.
Paulo Ribeiro – HSBC
Okay. Just quickly another question on Hipercard and Redecard. If you bring Redecard into Itaú in a successful tender offer, do you think then to change the commercial – to fold Hipercard into Redecard kind of to maximize? You said it’s a dormant business early in the call in Portuguese. So you think that there is a way to realize the potential of Hipercard?
Roberto Egydio Setubal
Yes. Over time this probably would be the more rationale thing to do. Integrating those businesses would be something that probably we would do over time.
Paulo Ribeiro – HSBC
Great, thank you.
Operator
Our next question comes from Mr. Paulo Passoni from Third Point.
Paulo Passoni – Third Point
Thank you very much. First of all congratulations on your decision to not go to the de-listing of Novo Mercado. I think the capital market benefits from that tremendously and I am very happy that you guys took that decision.
Secondly, the first question is assuming that you – the transaction does not happen and you change the commercial terms, the commercial terms between Redecard and Itaú is clearly a related-party transaction that exceeds a 200,000 reais contract. So what would be the procedures for that contract to be changed as it relates to approval of minority shareholders?
Roberto Egydio Setubal
Well, the way I envision it is something like we would propose a change based on volumes and data that we have other way we support the business of Redecard, about the number of merchants, the amount of money that goes through Itaú and we would propose this change. Probably this would have to go to the board of Redecard to approve something like. The board of Redecard – the company has four very high-qualified, independent members. Itaú, although we control the company, we have only four members as well and this board would be the board that would approve or would have to analyze, at least, the new conditions.
As I mentioned, I believe that there will be no discussion that we at least should be treated the same way that other banks with lower volume are being treated by Redecard, I think this would be more than fair because Redecard already recognized the value that those banks bring, although they bring much less volume than we do, they bring business as is the interest of the company. So I believe that the same treatment, at least, as I mentioned, could and has to be extended to Redecard.
Don’t worry because this will be treated at the highest level of governance that we can do because as I mentioned this is very conflictuous and we have to be very clear to everybody that we are doing those changes in the right way.
Paulo Passoni – Third Point
And I have another follow-up question, Roberto, to that question, which is the comparison said or other clients of Redecard. Just help me reconcile, when you also compare that to Cielo, and Cielo has contract terms between Cielo and Bradesco, Cielo and Banco do Brasil, we do not know those terms. However what we know is the average MDR for Cielo is actually higher than Redecard today and if you were to lower the MDR of Redecard and the gap would further increase.
So can you just help me understand that your view at least if you think perhaps Cielo is paying too much to Bradesco and Banco do Brasil?
Roberto Egydio Setubal
Look, what I am trying to show to you is that this business is changing and will change more and more over time. I think this is the message. I am not sure exactly how this will change, what’s the ending game of this and how we will get there and how fast we will get there.
But in my mind this business will – the value change – I mean you have to keep in mind that those companies when they came into the market they had a very specific competitive advantage, which was the exclusivity on the brands that they had, they don’t have that anymore. So the trend because of that is that the market will be much more competitive and banks because of that has a much more important value in the chain. How this will be (inaudible), I do not know exactly, but make sure that this probably will happen because this is how the world, everything in the world is – how the acquiring business in the world works. Companies of acquiring business in the world don’t have the profitability that we have in Brazil. Those profitabilities basically come from the fact that they have exclusivity and there is this lack of time before the market adjusts, but this will get soon.
Paulo Passoni – Third Point
So the final question for me is given all the comments made in this call and what you just said about that and the high price to book value, just remind me again as an investor in Itaú, what is the rationale for Itaú to be doing this deal at this current valuation?
Roberto Egydio Setubal
As I mentioned there is a lot of conflict of interests. So we would like to go through the situation that we live today because this not only makes our movements much slower because we have to comply with all those governance issues and we have to go through big discussions on what are the pricings and what are the conditions that we should serve and we should discuss with Redecard. So this is very bureaucratical, it’s not something we would like to live with.
Second is the fact that we want to verticalize this business. We believe in the bank that the fee business, service revenue is something that we want to increase over time. Those are important bases for the business we believe we have for our franchise. This also integrates with a lot of other offers that we make with merchants and clients at Redecard. So there is a lot of things that we would like to do in terms of freeing up ourselves from this situation that we have today in order to obtain more synergies and more integration about the offers we do with the clients.
We believe also that we should offer the market since we brought the company to the market in a condition that if we are not successful in doing this acquisition or renegotiating our commercial conditions with Redecard, which I believe will be successful, I am very positive on that. I think that we have to discuss internally the alternatives that we have and definitely we will have to consider the alternative of doing it alone.
Paulo Passoni – Third Point
Okay. Just I remember, one final question is some press articles are mentioning that, pointing out that Rothschild used a 6.7% market risk premium when the common practice at most banks is 5%, 5.5%. Do you have any view on that, on why they used such a high market-risk premium?
Roberto Egydio Setubal
Come again on your question, I did not really understand.
Paulo Passoni – Third Point
My question is the discount rate on the DCS done by Rothschild, they used 6.7% market-risk premium and some news articles have commented that that is much higher than anyone uses nowadays and most banks in value in businesses use 5%, 5.5%. Do you have any view as to why Rothschild used a higher number and what’s your personal view on that number?
Roberto Egydio Setubal
Well, I did not go into the details of the numbers of Rothschild. In our projections, for instance, we used lower margins than, I mean in our projections we expect margins to grow faster down than the numbers that Rothschild used. And we came, maybe I am not sure, the number, their risk number that we have used. But small differences in the way you obtain numbers I believe are natural. I believe that all the numbers that Rothschild used are pretty much in the range that the market uses. So this is the most important thing.
I could offer you a lot of projections that show you a much lower price for Redecard and by the way I think it’s much easier to think about lower price, scenarios of a lower price than scenarios of a higher price.
Operator
Our next question comes from Mr. Drew Figdor from Tiedemann & Co.
Drew Figdor – Tiedemann & Co.
Hi. A couple of questions over here. I wanted to ask you about the synergies you saw in combining the Redecard business into Itaú. What sort of cost savings do you think that you could achieve by doing that? And then similarly you discussed a few times the idea of trying to expand the acquisition platform you have within Hipercard and I believe you had mentioned, you can correct me if I am wrong, an 18 to 24-month type of time to do that and I was hoping you could talk a little bit about the sorts of amounts of capital you would expect to have to spend to do that, and frankly what you would expect the return to be on such an investment given that once you brought the market to have pretty strong players you would expect pricing across the board would be lower for everybody in the short time.
Roberto Egydio Setubal
Okay, let me start with you synergies. First of all, it’s important to remember that the price that we are offering is established based on a standalone company. We didn’t take into consideration, for instance, the fact that many things could happen. I mean the appraisal was based on a standalone company, the valuation of Rothschild. And we didn’t take into consideration things that might happen if the company is not anymore a standalone company. They did not take into consideration things like efficiency synergies and also did not take into consideration losses because of renegotiation of the commercial side. So this is what I would say in that regard.
In the case of Hipercard I really did not understand what is your question. Could you come again?
Drew Figdor – Tiedemann & Co.
Maybe it is less about Hipercard and it’s more about you were discussing if you did not complete the offer and you would end up in a new merchant acquisition business. I was hoping you could estimate the sort of capital that would cost you to build a new merchant acquirer and what you would expect the margins would be in the short run in a world where there were three merchant acquirers in Brazil, three strong ones, an independent Redecard, Cielo and this new one backed by Itaú and whether you expect to be able to achieve reasonable rates of return on that incremental capital.
Roberto Egydio Setubal
Our analysis shows that this is a very – the return on the investment of developing a new acquiring is very high. So we could do it easily if we thought only about the way we would develop the business. But as everybody knows we would lose some money in the investment that we had in Redecard. So the more successful this company is the more we lose in Redecard and we know everything, everybody knows that and so I am not saying anything new. But when you do the numbers, the end game is for the thief, for Itaú if we go on a standalone on our own business.
Drew Figdor – Tiedemann & Co.
Right. Our point of view is that those should be considered, the synergies from your conversation earlier since the opportunity to save money and create additional market share only comes about from the consolidation?
Roberto Egydio Setubal
Yes; maybe we have different points of view, different ways of looking to the business. I can understand that you can think this way.
Operator
Our next question comes from Mr. Carlos Macedo from Goldman Sachs.
Carlos Macedo – Goldman Sachs
Good afternoon Roberto, good afternoon gentlemen. I have a couple of quick questions, the first is, Roberto, you have mentioned a scenario that you think that margins are going to go down and we saw in the forecast that came from Rothschild a lot of them that came with the source being the company and that they do look at MDRs declining quite significantly over the next few years.
If you could give some color about what the second scenario that you mentioned which presumably will be one that you would apply to Redecard in case you were, and to the market in case you were successful with your tender and give us an idea what the outlook is in case of that success?
Roberto Egydio Setubal
I do not have numbers here. I think that we can design many different scenarios of MDRs, but remember that these are – the current levels of MDRs are much higher than the ones we have internationally. So the trend either way it will get there even if Itaú stays with Redecard, even if Itaú goes standalone, at some point those things will happen, markets will earn as it does everywhere in the world.
So it’s not a matter of a different strategy will lead to different situations. We have to understand that we have a completely different and specific situation in Brazil because of this exclusivity and this was the starting point. Over time, 5, 10 years, it will get there, there is no way Brazil will be different from other markets.
Carlos Macedo – Goldman Sachs
Okay, and the second question then would be related to in case you are unsuccessful in your tender for Redecard, you have mentioned the possibility of divesting from the shares of the company. Given the scenario that you laid out with the banks being as important as they are for the existence of these acquiring companies, what kind of price do you think would be reasonable to ask for somebody to pay for the shares that you own?
Roberto Egydio Setubal
This is a long, long discussion. Look, I don’t have a number to give you today; but it won’t be that high.
Operator
Our next question comes from Mr. Jose Barria from Bank of America.
Jose Barria – Bank of America
Hi good morning gentlemen, thanks for taking my question. Just a quick question here on the timing and the expected date for the auction which you put on the presentation as July, August. What consideration is being given to the dividend that would be relevant for the first half of 2012 in case this does go to August considering that Redecard usually pays a dividend in August of the current year?
Roberto Egydio Setubal
We are not considering changing the policy of the company. Basically what we are doing we will do what every year the company does. I am not exactly sure exactly what the company does but we won’t change the policy. I know that we are distributing a dividend right now, I think the company has a yearly dividend and this is what we will keep on doing.
Operator
Ladies and gentlemen, this concludes today’s question-and-answer session. Mr. Setubal, at this time you may proceed with your closing statements, sir.
Roberto Egydio Setubal
Okay, thank you very much. I think this was a good conference call, we had the opportunity to talk and to make clear more things. Thank you very much for listening to us and giving us the opportunity to do that.
Operator
Thank you. That does conclude our Itaú Unibanco Holding conference call for today. Thank you very much for your participation and have a good afternoon.
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