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Aaron's Uses Acquisition to Thwart Takeover

Source: Wikimedia Commons.

Enough is enough. Rent-to-own leader Aaron's (NYSE: AAN  ) achieved its goal of getting private equity firm Vintage Capital to back off from its proposed $2.3 billion takeover offer, but in the process may have damaged the value of the company to investors.

After three previous attempts at acquiring Aaron's failed because management simply ignored the overtures, Vintage went public with the latest effort, valued at $30.50 per share, in hopes of generating some pushback from investors to get management to consider its bid. While Aaron's did form a "transaction committee" to review the offer, it saw no need to meet with the PE firm and chose instead to adopt new corporate governance practices hostile to shareholder interests.

Earlier this week, however, the rent-to-own center sued Vintage for "trying to obtain control of Aaron's through an illusory proposal," and then followed that up with an announcement it was acquiring Web-based lease-to-own financing shop Progressive Finance Holdings for $700 million. After it rejected Vintage's offer, this proved to be the last straw for Vintage, which declared it was withdrawing its bid, believing Aaron's "grossly" overpaid.

Like Aaron's, the Web-based lender serves those who cannot obtain traditional financing for consumer purchases like furniture or electronics and are turned away by traditional banks when they come in seeking loans, or by retail establishments themselves that fear the risk associated with extending credit. Progressive has said that where retail stores turn away up to 60% of customers because they don't qualify for credit, it approves 80% of those customers.

Progressive maintains relationships with some of the largest U.S. retailers that will add about 15,000 new sources of revenue and is a large part of why Aaron's sees the acquisition as "transformative" for the retailer, since it will be able to add 18% gains to its cash earnings per share this year and 26% next year. It did find it necessary to reduce first-quarter guidance because of bad weather, but taking on $426 million in new debt to finance the transaction -- $126 million in a new senior debt facility and $300 million in private placement notes -- will substantially increase its debt load while it's experiencing falling traffic.

Although Aaron's target customers are those most in need of financial alternatives, they're also the ones being ground down by the moribund economy, which doesn't bode well for bolstering sales. Progressive Finance may bring in more opportunities, but Vintage says it needs to revalue the rent-to-own specialist, particularly in light of the new debt, and that leaves me thinking investors may have had enough as well.

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Editor's note: A previous version of this article incorrectly stated that Progressive uses data mining of applicants' social media contacts to judge borrowing risk. The Fool regrets the error.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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9/4/2015 4:02 PM
AAN $38.02 Up +0.79 +2.12%
Aaron's, Inc. CAPS Rating: ****