Citibank significantly overpaid to grab the Costco co-brand away from American Express — even though the deal should have been worth more to American Express than to Citi.
Indeed, under the arrangement Costco’s credit card acceptance costs will be near zero.
Now, I knew this was a big deal for American Express. I’d previously written that Costco’s sales volume is ~ $100 billion, and of course they only accepted American Express.
But still this is staggering (HT: Hans M.)
The investors contend that the U.S. Costco co-branding contract was “highly material to AmEx’s business,” representing 8% of the company’s revenues in 2014; 20% of its outstanding loans and 10% of its cards issued worldwide.
Retaining Costco at terms similar to what Citi offered probably wouldn’t have been good for American Express’ bottom line or share price. But Citi’s aggressive offers — too aggressive for American Express to match — mean a real blow for Amex, and one reason why its share price continues to lag. Indeed, trading at a lower multiple of forward earnings than peers, only explanation would be that the market seems to believe that American Express has lower growth prospects in the future than they have in the past.