First Union Corp., reaching for nationwide leadership in consumer and small-business lending, has agreed to buy Money Store Inc. for about $2.1 billion.
The deal, the latest in a string of acquisitions by First Union, gives the Charlotte, N.C., powerhouse a big foothold in the market for subprime mortgages, a business that many banks have been struggling to tap. The combined company would easily rank as the largest in the field.
Shares of other subprime lenders jumped sharply in reaction to the deal, as investors bet that other banks would follow First Union's lead. Several posted gains of about 10%.
After weeks of rumors that Money Store was about to sell, First Union agreed to pay $34 a share, or $2.1 billion, for the Union, N.J., lender, a price that is slightly higher than was expected-and one that drew criticism from some analysts.
First Union emphasized the strategic value of the deal and said it would add to earnings this year.
"The combination with the Money Store fits perfectly with our retail strategy of meeting the needs of all customers when, where, and how they want," said First Union president John Georgius.
Money Store will be run as a separate entity, and its management will be retained, as will all 172 branches and a call center, the bank said.
The deal comes on the heels of First Union's $16.6 billion agreement for CoreStates Financial Corp. First Union also has snapped up Signet Banking Corp. and the investment bank Wheat First, Butcher Singer.
First Union and most analysts, however, said that they saw few problems in absorbing Money Store.
"What we're looking at here is not making a lot of changes with the Money Store," said Jack Antonini, head of the bank's consumer group.
First Union is not "not trying to rip out the guts of an organization and meld it," added Hal Schroeder of Keefe, Bruyette and Woods.
The acquisition vaults First Union to the top of the heap in small business administration lending. Money Store's SBA unit made $729 million of SBA loans last year, to rank first in the nation.
But most eyes were focused on the clout the move would give the bank in the subprime mortgage sector.
Based on 1997 origination volume, the merger will create a home equity lender nearly twice the size of the next largest player, with $12.5 billion of loans originated.
About one quarter of the population can be classified as "subprime," estimates Wholesale Access, a Columbia, Md.-based consultancy. But big banks' attitudes have varied. BankAmerica Corp. and BancBoston have put their subprime units onto the block, while NationsBank, KeyCorp and others are expanding through acquisitions or internal growth.
Comptroller of the currency Eugene A. Ludwig, who has been warning banks about declining credit quality, told reporters Wednesday that he saw no immediate obstacle to the acquisition. "The finance business essentially is a banking kind of business."
Mr. Ludwig said banks' efforts to expand affordable mortgage lending programs have given them some valuable experience in managing the risks of sub prime lending. While lenders may face higher delinquencies, they can bring them down through techniques such as credit counseling, he said.
"Having said that, I don't want to say this is easy or you don't have to work at it," the comptroller said.
Adding Money Store compliments First Union's existing home equity operation, which originated a substantial portion of its $7.2 billion of home equity loans through contractors and brokers, said Anthony Davis, an SBC Warburg, Dillon Read analyst. Money Store uses predominantly retail channels, he said.
The transaction may very well signal a sea change in the way that banks view finance companies, said Richard X. Bove, banking analyst at Raymond James & Associates, Tampa, Fla. "It's a recognition that banks have figured out that this is not a high risk area, and have figured out how to underwrite the risk," he said.
A subprime unit takes "too long to build," Mr. Bove said, so more finance company acquisitions are sure to be pending.
Such speculation drove up share prices across the subprime sector. Aames Financial Corp., Los Angeles closed up 9%, or $1.187, to $14.312; United Companies, Baton Rouge, closed at $18, up 12% or $1.312 and Contifinancial Corp., New York, was up 8%, or $2.062, to $29.375.
Money Store was founded 31 years ago, by entrepreneur Alec Turtletaub, who used advertising featuring former Yankee shortstop Phil Rizutto to build national name recognition for the firm.
Mr. Turtletaub's son Marc, now chief executive, transformed the company from a home equity leader into a full-spectrum provider.
A year ago, such a sale would have been unthinkable. The Money Store was well recognized as one of the most respected companies in the specialty finance sector. Capital was plentiful, and the equity markets were smiling on the lenders.
But that was before the industry ran into land mines in the form of earnings restatements at a number of companies, most noticably behemoth manufactured housing lender Green Tree Financial Corp., which took $200 million in writedowns for loans that refinanced faster than expected.
Gain on sale accounting, which has allowed securitization-oriented lenders like the Money Store to book profits before they actually appear, has led to skepticism about the quality of the companies' reported earnings.
Stock prices have depreciated significantly in recently months, and capital is drying up-a major reason for the sale Mr. Turtletaub said. An acquisition by First Union "offers us the opportunity to have a much lower cost of funds at a time when we're unlikely to get them anywhere else."
Executives in the specialty finance sector lauded First Union's purchase as a sign of good things to come.
"It's a positive in that it validates the sector," said Cary Thompson, chief executive of Aames Financial Corp., a Los Angeles-based lender that has been on the block. The company is "still in discussions," Mr. Thompson said.
"The sector couldn't be happier that this deal got done at a good price," said Daniel Phillips, chief executive of FirstPlus Financial Group, Dallas. "My sense is that you will see a lot more partnerships."
First Union's acquisition of the Money is expected to close during the third quarter. First Union expects to then take a $20 million charge, but told analysts during a conference call that the deal will add 4 cents per share to earnings this year and 8 cents next year.
Some analysts complain that First Union doesn't know what it has gotten into.
The bank's conference call with analysts on the deal "didn't do a very good job of selling us," said one. "In fact, it raised more questions than it answered," he said, because First Union didn't thoroughly address the accounting issue.
The bank did say that it will make the Money Store's gain on sale assumptions more conservative, eliminate 7% of the company's orating expenses, and book zero revenues from the acquisition in 1998. But these seemingly frugal moves are not enough to justify the purchase price, some say.
The $2.1 billion deal "staggers me," said Steven Eisman, a CIBC Oppenheimer analyst who has been increasingly bearish on the specialty finance sector.
In 1997, Money Store earned $2.06 per share, but eliminating gain on sale assumption-in an effort to make the earnings comparable to a commercial bank-Mr. Eisman calculated that the Money Store made only $0.35 per share.
By Mr. Eisman's analysis First Union paid 100 times 1997 earnings for the company. After factoring in the cost savings Money Store will achieve on the funding side, First Union is paying 35 times earnings, he said.