Two giant finance companies startled the industry Tuesday by announcing premium-priced deals that would radically reshape specialty lending. The announcements left the market awaiting a wave of further deals.
First, Green Tree Financial Corp., the recently troubled manufactured- housing giant, announced an agreement to sell itself to the insurance company Conseco Inc. for $7.6 billion, or $52.928 a share, well above the Monday closing price of $29 a share. The newly merged entity would have more than 11 million customers and managed assets of $60 billion.
A few hours later, Household International said it would pay $8.6 billion for Beneficial Corp., or $150 a share, well above analysts' early estimates of about $120 a share. Beneficial put itself on the block in February. The combined entity would have more than $62 billion in managed receivables and 30 million customer accounts.
Observers said the dealmaking represented the natural progression of change in consumer finance. The end result, they said, will be a handful of megasize nonbank institutions that offer a full menu of products to consumers, in addition to super-specialized niche players.
"Consumer lending businesses have been extraordinarily high-growth in the past 10 years," said Edward E. Furash, chairman of Furash & Co., Washington. "Now we have a situation where everyone is carrying around multiple lines of credit." Consolidation was inevitable, because the prospects are "not strong enough to keep up the growth rate of volume."
"Traditional categories and traditional companies are disappearing," said Conseco's chief executive Stephen C. Hilbert in announcing the Green Tree deal. The combined company will be a "financial services juggernaut," he said, focused on middle America.
Deals are happening now in the specialty finance sector in part because the industry has taken some hits in recent months.
Writedowns by several major companies, most notably Green Tree, made investors wary of the reliability of earnings estimates. Capital markets for these companies tightened and stock prices fell, creating a bargain- basement atmosphere.
Money Store, a veteran home equity giant, was the first to sell, going to First Union Corp. for a higher-than-expected $25 a share. The deal has had a "snowball" effect, said Jennifer Scutti, an analyst with Prudential Securities. "People are getting panicky as they see other acquisitions happen around them-now is the time to strike."
"The spirit is really carpe diem," said a hedge fund investor about the intensity and pricing. "Get all you can."
Green Tree embraced that philosophy, observers said, with a deal that one analyst called "astounding." The almost $53 a share is above the company's 52-week high of $49.8125.
Conseco's CEO, Steve Hilbert, justified the purchase prices by the cross-selling opportunities that the acquisition provides, and by Conseco's lower cost of funds. Green Tree was recently downgraded by Standard & Poors, making it difficult for the company to secure short-term financing.
Mr. Hilbert said the deal would reduce expenses at Green Tree by $40 million.
Lawrence Coss, the controversial Green Tree CEO, will remain at the helm of the company indefinitely, he said in a conference call on the deal. "I signed a contract in blood," he quipped. "I'm staying around as long as I can to make a contribution."
Conseco and Green Tree are making much of their similarities. Both have "precisely the same culture and the same target market, middle America," said Mr. Hilbert. Both CEOs also founded their companies with minimal personal investment and emphasize entrepreneurial sales skills. "We haven't even closed the deal yet, and we're already integrated," he said.
Outside observers said the companies were a good fit, but were skeptical about Conseco's ability to cross sell and reduce expenses enough to justify the price paid. Green Tree shares climbed sharply on the news, hitting a high of $44 during Tuesday's trading, closing at $39. Conseco stock was hit hard by the news, with shares trading as low as $48.375, down from Monday's close of $57.75, to close at $49.375.
Investors were also skeptical about Household's ability to wring value from their $150 price for Beneficial. The company traded as low as $137.3125 during the day, down from Monday's close of $146.75, and closed Tuesday at $140.75.
"The cost savings they are going to need to get are going to be very high," said analyst. "Will they be able to maintain the revenues?"
Household expects to wrench $450 million in annual cost savings from the deal and take a $1 billion charge at the close, expected in the third quarter.
Finn Caspersen, CEO of Beneficial, would be chairman of the combined company. Beneficial's stock hit a high of $139.50 during the day, up from Monday's close of $130.50, and closed Tuesday at $137.9375.
Some veteran players were surprised by the one-two punch of the Household and Green Tree deals, especially in the wake of Monday's Citigroup announcement.
"What is it, a full moon?" quipped J. Terrell Brown, CEO of United Companies, a long-time specialty finance company in Baton Rouge, La., that has recently been the subject of merger rumors.
The acquisition frenzy, though, is really reflective of buyers' need for more volume, he said. "A lot of companies have hit the wall on internal growth," he said.
Although deals in the sector are expected to continue, not all companies are subject to being bought.
"The properties that have been sold to date were the best platforms," said E. Reilly Tierney of Fox-Pitt Kelton. "I would hate to see a me-too wave, where the mediocre companies sell at high premiums."