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.

Three stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

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.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2922632, ~/Articles/ArticleHandler.aspx, 12/20/2014 6:45:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement