CIT Group Inc. said Monday that it agreed to acquire Newcourt Credit Group Inc. in a $4.2 billion stock transaction that would make CIT the world's largest publicly traded commercial finance company.
The deal would nearly double CIT's assets, to $50 billion, making the Livingston, N.J., firm the fourth-largest finance company, behind GE Capital Corp., Associates First Capital Corp., and Household International Inc.
It would also make CIT a market leader in Newcourt's dominant business line of equipment finance. Lenders in the sector ally with vendors and make loans to their customers. Newcourt counts Intel, Lucent Technologies, and Dell Computer among its customers.
Newcourt has amassed its $23.6 billion of assets mostly through a series of acquisitions. Most recently, it closed a deal for AT&T Capital Corp. in January 1998.
CIT would exchange 0.92 of its shares for each share of Newcourt, valuing the Toronto-based company at $4.195 billion, about a 10% premium over Newcourt's closing stock price Friday.
Analysts said CIT got a good deal, in part because it stepped in at the right time.
Newcourt has been struggling in recent months to secure low-cost funding after turbulence in the asset-backed securities market cut down on its profitability. A deal with Deutsche Bank that would have provided Newcourt with more equity fell apart last month.
Newcourt's stock has fallen from a high of $56.50 last March to $25.8125 on Friday. Its high cost of capital put it at a disadvantage to direct competitor GE Capital Corp., analysts said.
Shares of CIT fell $0.5625 Monday, to $30.1875, while Newcourt was up $0.5625, to $26.375.
CIT is adding bulk in a business that has yet to achieve critical mass.
"CIT is shaking off its boring blue-chip image and becoming a growth company," said Reilly Tierney, an analyst with Fox-Pitt, Kelton in New York. The strategy has "some risks," Mr. Tierney added, including the need to inculcate an entrepreneurial culture.
CIT chief executive officer Albert Gamper said in an interview that he preferred to call the combined entities a "blue-chip growth company."
Mr. Gamper said CIT's deal is part of a continuing trend of consolidation in the financial services industry. "I don't think that the small finance companies that are very narrowly focused with one or two product lines can survive," he said. "Diversity and size are very important."
Mr. Gamper would remain as chief executive of the new company, and Newcourt chief executive Steven Hudson would be president. After the deal closes, CIT would have 20 members on its board of directors, 11 from the current CIT board and nine from the Newcourt board.
CIT said it would significantly reduce Newcourt's reliance on securitization. Instead, the new company would hold loans in its portfolio.
The combined entity would achieve $150 million in cost savings and a 16% return on equity in 2000, CIT said. This year's results would be affected by a $140 million reduction in securitization gains, CIT said. CIT projects 76 cents a share of earnings in the second half of 1999, versus $1.14 in the first half of the year.
"Long term it's a good deal, but short term, its dilutive," said CIBC Oppenheimer analyst Steve Eisman, who lowered his 1999 earnings estimates for CIT by 56 cents, to $1.82 a share.
The deal would bring Dai-Ichi Kangyo Bank's stake in the combined company to 24%, down from a 45% share of CIT Group. Newcourt's two largest shareholders, CIBC Securities and Nomura Securities, would own 5% and 6% of the new company, respectively.
J.P. Morgan acted as adviser to CIT. Goldman Sachs and CIBC Wood Gundy were advisers to Newcourt.
