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The Times: Mills in the money again as Nectar card company is sold to Canadians for £350m

December 4, 2007
Patrick Hosking, Banking and Finance Editor

Serious money can be made out of loyalty cards, the fiddly bits of plastic that clutter up the wallet and delay the simplest shop transaction. Unfortunately, to do so, it helps to be a shareholder, rather than a cardholder.

Sir Keith Mills clinched one of the entrepreneurial coups of the decade yesterday, multiplying his start-up investment 450 times in only five years when he sold LMG, the business behind Nectar cards.

Aeroplan, the Canadian loyalty marketing company, is paying £350 million mostly in cash for LMG, which began Nectar in 2002. At the time Sir Keith, the chairman, injected “a few hundred thousand pounds worth” of research and development work in return for his 46 per cent stake. Yesterday he sold that stake for £160 million.

Other LMG managers also hit the jackpot, selling their 19 per cent stake for £66.5 million. Warburg Pincus (WP), the private equity group that bankrolled the business with £25 million, pocketed £122 million. After exchange rate and other adjustments WP, whose past investments include Channel Five and London Weekend Television, is thought to have made 6½LMG boasts that every second of the day 19 Nectar cards are being swiped through terminals somewhere in the country. Customers of Sainsbury, BP, Debenhams and American Express use them to accumulate reward points. About 12 million people are holders of the purple and gold cards and 6,000 retail outlets accept them.

Loyalty cards were once belittled as “electronic Green Shield Stamps” by Lord Sainsbury of Turville before he executed a U-turn and introduced them himself to the supermarket group when confronted by the huge popularity of Tesco’s Clubcard.

But despite the drawbacks and the comparatively niggardly rewards for cardholders — Sainsbury offers a penny off future shopping for every pound spent — they do boost sales and foster customer loyalty, retailers believe.

Reward points can be redeemed for discount vouchers on future transactions or for cinema tickets, weekend breaks and other treats. Nectar says that it has paid out about £1 billion in rewards in the past five years.

Yet it is the ability of the card-issuing organisation to accumulate valuable information about the cardholders’ buying habits that really interests client companies. LMG uses the information not only to sell to partner companies, but also to outside grocery products companies such as Procter & Gamble.

While it never sells names and addresses of cardholders, Nectar slices and dices the information to provide data on shopping trends and to help companies fine-tune loyalty offers to maximise profits.

The price put on LMG of 12.5 times expected 2008 operating profits suggests that Dunhumby, the partly independent business behind Tesco’s Clubcard, could also be valuable.

It is not the first fortune for Sir Keith. He devised the Air Miles loyalty programme for British Airways before selling the business to the airline. He has done similar deals with other airlines including Air Canada. The Air Miles trademark remains with LMG.

Of his serial entrepreneurship, he said: “I get a kick out of a challenge, whether it’s winning the Olympics, the America’s Cup [he is backing a British yacht for the 2009 race] or setting up a business. Once a business is mature, it’s better run by other people.”

Asked what he would do with the £160 million, he told The Times, “I’ve no idea . . . probably go out and buy another business.” Investment bankers, form an orderly queue please.

Buying loyalty

Green Shield stamps
Hugely popular in the 1960s and 1970s, Green Shield Stamps were tokens given out to customers by shops when they bought goods. They could then collect books of the stamps to buy a wide range of items featured in a glossy catalogue, such as toasters, cookers and televisions. Tesco abandoned Green Shield Stamps in 1977, saving £20 million

The Co-op Divi
For many years the Coop shared its profits with customers through a form of dividend known as the “divi”, a cash-based loyalty payment that became a popular form of saving for millions of shoppers. The system was phased out by many of the larger Coop groups in the 1960s and 1970s due to costs

Tesco Clubcard
Tesco launched its now-famous loyalty card in 1995. Customers collect one point for every £1 they spend in stores, online and the firm’s petrol stations and are rewarded with vouchers each quarter entitling them to money off their bill

Airmiles
Created by Sir Keith Mills, Airmiles claims to be the UK’s longest-running loyalty programme. Collection partners such as Lloyds TSB, Tesco and Shell give points to customers based on their purchases. Consumers can then trade these for a wide range of travel rewards

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2994927.ece

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