KeyCorp is buying Champion Mortgage Co., a specialist in subprime home equity loans, for $200 million in stock as part of a plan to invest in higher-return businesses.
The deal, which was strongly rumored in recent weeks, was announced Monday and is set to close in the third quarter. The merger discussions were under way last month when Champion withdrew plans for an initial public offering.
KeyCorp is interested in making Champion, based in Parsippany, N.J., a national business, much like its own direct auto finance company, bank officials said.
Cleveland-based KeyCorp gets about 20% of its earnings from consumer finance, the fastest-growing segment of the company, said analyst Joseph Duwan of Keefe, Bruyette & Woods Inc.
The Champion deal is in keeping with KeyCorp's stated goal of divesting unprofitable businesses-it is selling or closing 280 retail branches this year-while investing in higher-growth businesses, including consumer finance.
"As we divest of businesses in areas of low growth potential, companies like Champion are where we intend to redeploy our resources," KeyCorp chairman Robert W. Gillespie said in a prepared statement.
Michael Mayo, an analyst with Credit Suisse First Boston, said, "KeyCorp is buying its way into a faster-growing business. The relevant question is: Do the price and the future earnings make sense?"
KeyCorp said the acquisition would add to earnings in 1998.
Mr. Duwan said KeyCorp indicated that Champion could post $27 million of revenue next year. That would boost net income by $5 million to $10 million, or 4 cents per share, he said.
But other analysts said it is difficult to analyze Champion's earnings potential. In documents filed with the Securities and Exchange Commission last year, Champion put its pro-forma total at $10.4 million for the fiscal year that ended Sept. 30. Company officials now say that figure is meaningless and was an attempt to give potential shareholders a best-guess estimate.
Analysts noted that subprime lenders-companies that deal with people with blemished credit-pose a risk. "It's another revenue source-as long as the economy doesn't hit a downturn or home prices don't decline," said Mr. Mayo.
But James H. Downing, group executive for KeyCorp's national home equity business, said home equity is relatively safe.
"There will always be economic and credit cycles, but what we like about this business is, looking backward, its volatility is significantly lower than auto and credit cards," Mr. Downing said.
KeyCorp's consumer finance unit, with $14.7 billion of assets, is a mix of prime and subprime businesses, including indirect auto finance, student lending, credit cards, and boat and recreation-vehicle financing. Champion will add another element to the business, which KeyCorp plans to expand considerably.
Champion, which would retain its name, is now in five eastern states: Maryland, New Jersey, New York, Pennsylvania, and Rhode Island. KeyCorp officials said they plan to take it nationwide over the next five years.
KeyCorp has a presence in 46 states, mostly through its auto finance subsidiary, Autofinance Group Inc. of Chicago, which it bought in 1995.
Champion originated $500 million of home equity loans in 1996, and its originations have grown by about 30% a year over the past several years, Mr. Downing said. The finance company was founded in 1981 by Joseph P. Goryeb, its chairman and chief executive officer, who would retain those titles after the deal closes.
Mr. Goryeb's family owns 100% of Champion, and his two sons, Joseph M. and Richard P., are to remain co-presidents. Under the agreement, the Goryebs would have incentives to receive additional shares in KeyCorp over the next three years.
The elder Mr. Goryeb may be most identifiable from the company's television commercials and his slogan: "When your bank says no, Champion says yes." Mr. Downing said KeyCorp plans to continue the advertising because it has been effective.
In general, Mr. Downing said, KeyCorp would leave Champion "very much alone, with a high level of autonomy."