Analysts said they expect Newcourt Credit Group Inc. to post second- quarter earnings strong enough to rescue its merger deal with CIT Group Inc. But some still expect CIT, which offered in March to pay $4.2 billion for the Toronto-based lender, to lower the price.
The deal became uncertain when Newcourt missed analysts' earnings estimates for the first quarter and failed an earnings test that was includedin the merger agreement.
"Most people expect Newcourt to meet the earnings test in the second quarter," said Reilly Tierney, an analyst at Fox-Pitt, Kelton. "It will strengthen Newcourt's hand and reduce CIT's options of getting out."
Under the merger agreement, Newcourt had to make 38.25 cents a share for the second quarter. Analysts' consensus is that the Canadian company comfortably beat that target by earning 42 cents, according to IBES International Inc.
Newcourt is expected to release the report in the first or second week of August, analysts said. Newcourt's investor relations person, Jeffrey Iichi, said that "nothing was definite" regarding an earnings release date.
Newcourt missed first-quarter earnings targets, because it securitized fewer loans than expected, and thereby hurt its margins, analysts said.
Some observers said CIT could reduce its original bid of 0.92 shares for each of Newcourt's, to as low as 0.5% to 0.65%. An exchange ratio of 0.5 would mean zero premium, Mr. Tierney said.
But he said an 0.5 exchange ratio is not as bad as it seems. "Newcourt's book value is $20 a share, and a deal that is under $20 would result in a writedown in Newcourt's goodwill," and therefore help CIT's future earnings, he said.
Many analysts said Newcourt may have no choice but to accept a rock- bottom offer, because the company's ability to survive on its own is doubtful, and the prospect of finding another buyer is slim. As a stand- alone entity, Newcourt would have difficulty funding itself, some analysts said.
Daniel Martin, a credit analyst at Standard & Poor's, said Newcourt would risk a downgrade in its credit rating if it does not merge with CIT or another comparable company.
Newcourt's credit rating for senior debt and commercial paper is BBB/a2. A lower rating would make its funding costs too expensive, and Newcourt would not be able to pass those costs to their customers, because the market is so competitive, analysts said.
"If they can't fund themselves in the debt and commercial market, they will be forced to go back to securitizing, which would put their margins under pressure," Mr. Martin said. "They would also have to fall bank on their bank lines, but those relationships would have to be renegotiated again."
Some analyst are skeptical that another bidder will enter the picture if CIT walks away. Newcourt has Goldman Sachs & Co. as an investment banker.
Finova Group Inc. and Heller Financial Inc., other finance companies, are not big enough to buy Newcourt, Mr. Tierney said.
Banks and other financial institutions are likely to be wary of making a bid for Newcourt, because acquisitions of finance companies have resulted in lower stock prices for the acquirer. Examples include First Union Corp., which bought Money Store, and the insurer Conseco Inc., which bought Green Tree Financial Corp.
"A company that acquires them is going to be slapped down by the market," Mr. Tierney said.
