CIT Group's $560 million deal to buy Heller Financial's domestic factoring business is likely to sharpen the competition between CIT and Bank of America Corp., one of the few remaining big U.S. banks in the business.
Heller's commercial services unit, which has $435 million of net assets, provides factoring, asset-based revolving credit facilities, and accounts-receivable management to clients in the domestic textile and apparel industry.
Because many of these clients are in the Southeast, the acquisition is likely to intensify the competition between No. 1-ranked CIT and Charlotte, N.C.-based Bank of America, analysts said.
"With this deal, CIT is probably about 40% of the market, so if you are a remaining player like Bank of America, you have to either start making acquisitions or think twice about remaining in the business," said an analyst who asked not to be identified.
Factoring entails buying accounts payable from clients who are typically retailers or wholesalers.
It is profitable because it offers high interest rates, but it is also slow growth and carries risks. Several major U.S. banking companies have recently left or made plans to leave the business, including Bank of New York Co., which agreed in June to sell its asset-based lending and factoring business to General Motors Acceptance Corp.
The $1.8 billion deal would make GMAC No. 2 in the domestic factoring business, ahead of Bank of America. In April, First Union Corp. of Charlotte, N.C., sold its factoring unit to CIT.
With CIT's huge scale -- its volume could be as much as $27 billion after the completion of the Heller deal, expected by yearend -- competition is likely to get tougher and margins of other factors are likely to get squeezed, analysts said.
"Scale is of paramount importance now, given the consolidation in this industry," said Darrell Hendrix of Friedman, Billings, Ramsey. "The margin pressures require you to have razor-sharp efficiency, and that takes scale."
It was unclear Tuesday whether Bank of America would consider a sale of its factoring business. The $614.1 billion-asset banking company could not be reached for comment. But analysts said this was a possibility.
"Bank of America would probably be the next to look at selling," said Reilly Tierney of Fox-Pitt, Kelton Inc. in New York. "They may like to hang on to this as a convenient service to offer textile clients in the Southeast; but then again, look at what First Union did," Mr. Tierney said.
In a conference call Tuesday, Heller chairman and chief executive officer Richard J. Almeida acknowledged that Heller's factoring business was not large enough to justify the investment required to foster growth.
"We needed to either be number one or two, or exit the business," he said. Heller plans to plow the proceeds of the sale into several other businesses, including lease servicing, its newly acquired health-care finance unit, and small-business lending, he said.
While analysts said they expect CIT to continue to buy factoring operations, they also said no new major acquisitions are likely to occur in the short term. CIT is also buying Newcourt Credit Group Inc., in a deal that would nearly double the firm's managed assets to roughly $52 billion.
