When the going gets tough, I guess it's time to go shopping. Rent-A-Center (Nasdaq: RCII ) has been challenged on the organic growth front for some time now, but apparently sees the opportunity to build value by taking out rival Rent-Way (NYSE: RWY ) for $10.65 a share in cash.
I use the term "rival" loosely. Rent-Way really isn't in the same league as Rent-A-Center or Aaron Rents (NYSE: RNT ) when it comes to revenue, margins, or returns. The inner math nerd in me, though, sorta finds it amusing that Rent-A-Center is roughly twice as large as Aaron Rents (in terms of revenue) which is in turn roughly twice as large as Rent-Way.
As near as I can tell, Rent-Way offers Rent-A-Center both an operating efficiency play (cutting head-office/back-office costs and consolidating purchasing) and a "fixer-upper" play. Then again, Rent-A-Center management has recently proven more than challenged in getting its own business fully up to scratch, so I do have to question the wisdom of taking on another challenge of this scale. And if I want to be a real curmudgeonly skeptic, I'd observe that mergers frequently give companies the leeway to recognize "one-time" charges and items that can otherwise mask disappointing performance in the underlying business.
I do find it hard to question the price paid, though. It strikes me as a price commensurate with the value of Rent-Way as-is, so even if Rent-A-Center management proves aggressive in its cost-cutting/synergy projections, it shouldn't destroy value. What's more, it doesn't sound as though there's much overlap between store locations, since management did not indicate that it expects to sell many stores. Then again, given that this deal will give Rent-A-Center close to 50% of the rent-to-own market, I wonder whether the government will have any sort of anti-trust issues.
Rent-A-Center has done quite well as a Motley Fool Inside Value selection, and this deal won't hurt matters any. And if management can bring the acquired Rent-Way stores up to its own not-so-illustrious standards, that'll create real value. Heck, maybe the company will even be able to get same-store sales going again across the enterprise and begin restoring operating margins to former levels. Should that happen, investors might see some true value for their patience.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).