Advanta Corp. shocked analysts Wednesday with an announcement that it would consider selling its mortgage and leasing businesses.
Citing the lackluster performance of its stock, the Spring House, Pa., company said it is considering jettisoning the mortgage and leasing units in order to "unlock the unrecognized value." It would then focus on its business credit card operation. Advanta retained Salomon Smith Barney as an adviser.
Wednesday's announcement marks the second time in three years that Advanta has suddenly shifted strategic gears. In late 1997, it sold its consumer credit card business to Fleet Financial Group, confusing analysts and angering some investors.
"I'm surprised," said one analyst Wednesday morning, following a long pause after being told of the announcement. "They recently said they wouldn't be selling any parts of their business."
Another analyst said though he was not shocked by the decision to shop Advanta Leasing, which lost $6.2 million in the first quarter of 2000, he was surprised that the mortgage unit could also be sold. "It's the dominant business in the company," he said.
If Advanta is successful in selling both entities, this analyst said, "in effect they'd be changing from a subprime home equity company with some other businesses to a business credit card company. I'd look at them much differently."
Dennis Alter, Advanta's chief executive officer, said that Advanta, though exploring all options, is fully prepared to sell both units and continue as a "monoline" business.
"If the transactions took place, we would be a stand-alone credit card company," he said, adding that the company would also keep some insurance activities and Advanta Partners, its venture capital fund. "But the enormous profitability and growth in the business credit card division is one that we are anxious to take advantage of."
Though Advanta Mortgage has performed well, company officials said the company needs to provide more value to shareholders. In the first quarter of 2000, the unit brought in $9.5 million, more than 50% of the company's $17.1 million total net income, while Advanta Business Cards brought in $8.6 million. "The issue is not with the mortgage business, we're doing well there," said Bill Rosoff, president of Advanta. "The question is, can we realize more value for the shareholders now, rather than over the course of time? The market hasn't reflected our performance in the mortgage business."
"We are not receiving what we deem to be appropriate market valuation for these results," Mr. Alter said.
Fitch IBCA Inc. Wednesday immediately alerted investors to a possible rating change on Advanta, but cautioned that depending on what type of transaction Advanta finally seeks, ratings could be raised, lowered, or remain the same.
The last time Advanta tried to reinvent itself, it ran into trouble on several fronts.
When Advanta sold its consumer credit card operation to Fleet three years ago, several bondholders charged that the company had violated its debt covenant that stated it would not sell all or substantially all of its assets.
Fleet filed a $141 million lawsuit against Advanta in early 1999, charging Advanta had misappropriated funds and misrepresented the condition of the portfolio. Advanta counter-sued for $101 million. The litigation is still pending; a trial date is set for September 2001, according to an Advanta official.
The proceeds from the sale to Fleet gave the company's 1998 earnings a boost that couldn't be sustained in 1999. In addition, Advanta last year dropped gain-on-sale accounting, a controversial method in which the entire income a from loan is estimated recorded at the time the loan is securitized. Advanta now records income from loans as it is collected - which means lower earnings in the short term.
The result: revenues dropped 52% to $573 million last year from the year before, while net income dropped almost 89% to $50 million.
Advanta started cutting costs to make up for the lost revenue, and it has shown improved numbers over the last five quarters. Net income has increased steadily, from $6.8 million in the first quarter of 1999 to $16.6 million in the fourth. For the first quarter of 2000, Advanta reported a net income of $17.1 million.
David Weinstock, vice president of investor relations for Advanta, said though 1999 represented a more typical year than 1998, Advanta expects its earnings this year will increase 35%.
The market, however, is not so optimistic.
After trading as high as $37.5 around the time of the Fleet deal, the stock has steadily declined, hitting a low of $6 in October 1998. It has hovered between $15 and $8 over the last year. The stock traded around $12 Wednesday afternoon.
Mr. Alter cautioned that Advanta's value before the Fleet deal cannot be considered when looking at the company today, but said his company deserves more recognition. "The stock is trading at six times earnings, and we think it's worth far, far more," he said.
Advanta officials expect to make a decision on what action to take, if any, before the end of the year.