Sandy Weill is back at his big-time wheeling and dealing ways as Citigroup announces it will acquire Associates First Capital for $31 billion. While The Associates hasn't been the most popular company with investors, it will fit in well under Citigroup. As he has in the past, Weill is setting the pace for more financial services mergers in the future.
By
Weill's an old hand at the M&A game, so it was somewhat refreshing in a nostalgic kind of way to hear him spin today's jumbo-sized deal as way for Citigroup to expand its international and commercial leasing businesses and add greater scale to its already-large consumer finance and credit card operations. There's nothing like a multi-billion dollar merger to get the juices flowing again in the lazy days of late summer.
Weill is effectively trading away 10% of Citigroup's shares for The Associates, as the company is commonly known, with the deal expected to add at least $0.10 to earnings per share in the first year. The purchase price works out to $42.49 per share, or 52% above The Associates' closing price of $28 per share yesterday. The large premium may have given some investors pause today and potentially explains why Citigroup traded down this morning despite the accretive nature of the deal.
On a P/E basis, the price works out to about 20 times The Associates' trailing earnings. That's far from outrageous and is on par with the multiple the company fetched during most of 1999. For the record, The Associates is the second-largest finance company in the country (trailing only GE Capital), sports a very strong balance sheet, and has a solid reputation for consistent mid-teens earnings growth. Those attributes are definitely worth something. For its part, the much larger and diversified Citigroup currently has a higher trailing multiple at about 23 times.
However, Weill could have scooped up The Associates for less than 10 times trailing earnings as recently as March, when a smattering of credit quality problems and the threat of higher interest rates combined to send the company's stock down as low as $15 3/4 per share. Since then, credit quality in the firm's core home equity lending business (40% of net receivables as of June 30) has improved and Fed fears have eased. However, a cloud still hangs over the company in the form of a potential Justice Department suit regarding possible instances of racial discrimination by Detroit area mortgage brokers doing business with The Associates between 1995 and 1996.
The legal threat has kept the company's trailing multiple roughly even with its projected 14% earnings growth rate for most of this summer. However, a potential run-in with the Feds probably looks pretty mild in the eyes of someone like Sandy Weill. After all, it was Weill who more or less sounded the death knoll for the outdated Glass-Steagall Act when he rammed through the merger of Travelers and Citicorp in 1998.
Besides his political clout, Weill and Citigroup more importantly have the financial clout to cherry-pick just about any financial company with attractive high-returning businesses out there. The anticipation that more financial services deals are in the offing explains why companies such as Household (NYSE: HI), Providian (NYSE: PVN), and Metris (NYSE: MXT) are all trading sharply higher today. As in the past, the underlying theme that may be re-emerging is that Weill is setting the acquisition pace for the financial industry's other would-be leaders to follow.
Your Turn:
Post your thoughts on today's deal and the outlook for more big financial services mergers on the Financial Services discussion board.
Related Links:
The Associates Raises Credit Card Bet, Fool News, 12/28/99
Associates First Capital Turns in Q3 Numbers, Fool News, 10/12/99
RSS Headlines
Fool UK
