A series of earnings bombshells have cut stock prices in the specialty finance sector in half in recent months, leaving the industry's boosters to tout the companies as bargain acquisition candidates.
So far no one is buying.
Concerns about the companies' accounting methods will probably continue to frighten off banks and other potential buyers as long as unpleasant surprises keep cropping up. "Everyone says that someone's going to buy (home equity lenders) when the stock gets beat up, and it never happens," said Tom Facciola, a Lehman Brothers analyst covering the sector.
The most recent specialty finance land mine exploded Tuesday, when the St. Paul-based manufactured-home lender Green Tree Financial Corp. said it was taking an additional $200 million charge, driving the stock down more than $4 in the first hour of trading, to about one-third of its annual high.
Shares of United Cos. of Baton Rouge, La., also fell on the announcement that fourth-quarter earnings would fall short of expectations.
Despite the drastically reduced multiples at which the specialty finance stocks have been trading, banks have demonstrated little interest in making acquisitions in the sector since last year, when KeyCorp purchased Champion Mortgage.
Indeed, banks appear to be increasing their business rapidly without resorting to major acquisitions. According to an American Bankers Association study released Tuesday, bank home equity loan volume increased 24% from the third quarter of 1996 to the second quarter of 1997. Total closed-end home equity loans grew 14.8%, to $452.5 billion.
But some analysts-and some executives of the companies themselves-say it is only a matter of time. "What do banks need more than anything else in the world?" said Gareth Plank of UBS Securities. "Earning assets and customers. Where do you find them? Down the credit grade."
This stock devaluation is providing acquisition-hungry companies with "a great opportunity to focus" on home equity companies, said the chief executive of one East Coast subprime lender.
"My phone has been ringing off the hook" with offers from banks and other finance companies, said the executive, who requested anonymity.
Investment bankers are trying to line up deals with banks for their specialty finance clients, said a home equity chief executive on the West Coast. "Everyone is being peeked at."
Thrifts may be the most likely buyers, Mr. Plank said. CalFed Bank and the American Savings unit of Washington Mutual Inc. are two companies with executives that are "real money guys," he said. "They don't care as much about what looks good or what doesn't-they care about returns."
Last week various rumors tied Money Store, Union, N.J., to BankAmerica Corp., Household International, and WMC Mortgage Co.
Money Store could be one of the most appealing specialty finance companies for a bank, said Jennifer Scutti of Prudential Securities, because of the relatively high credit quality of its loans, its large retail franchise, and solid operating practices. The finance company's student lending and small-business unit are "all very familiar to a bank," she added.
Analysts estimated that the company could go for $30 to $35 a share-well above Tuesday's late afternoon price of $16.8125-for a total of about $2 billion.
BankAmerica has shown an increased interest in home equity lending and an openness to acquisitions, said CS First Boston analyst Mike Mayo. Household purchased Trans-america Finance Corp. last year and may be too busy digesting that buy to consider another one, Ms. Scutti said. But Household has expressed interest in acquiring a brand name retail franchise like Money Store, she added.
BankAmerica and Household spokesmen declined to comment on the rumors, but the Household spokesman said, "We view consumer finance and credit cards as industries that are experiencing consolidations."
Scott McAfee, chief executive of WMC Mortgage, which is backed by financier Leon Black, dismissed the rumor that his firm would be the buyer. "Frankly, I don't have the $1.8 billion right now to buy them," he said.