Keycorp said Tuesday it agreed to acquire AutoFinance Group Inc. for $325 million, marking the bank company's first entry into the profitable but somewhat risky business of "sub-prime" auto lending.
Cleveland-based Keycorp, paying a hefty 3.8 times book value, said the acquisition would dilute its earnings by less than 1% while allowing it to offer "a complete spectrum of financing options to dealers across the country."
Banking analysts barely flinched at a purchase price 40 times AutoFinance Group's annualized earnings of $8 million. Henry Coffey at J.C. Bradford & Co. in Nashville, said AFG was expected to grow 25% to 30% this year.
"Two years from now, if everything works the way it should, people will be asking how Keycorp could have paid so little," Mr. Coffey said.
AFG is a $125 million-asset company operating in 28 states. It is one of the nation's largest lenders on new and late-model used cars purchased by borrowers with less than top-quality credit histories.
Jay Myerson, executive vice president for consumer banking at the $66.8 billion-asset Keycorp, said it had to reject 40%, or $3 billion, of its $6.6 billion in car-loan applications last year that were below the "B" grade of credit.
After the latest acquisition, Keycorp plans to recapture 15% to 20% of the rejected loans and add them to AutoFinance's portfolio. That should ensure the transaction is accretive to earnings in two years, Mr. Myerson said.
The bank was willing to pay a high price for expertise in the field rather than start the business on its own, Mr. Myerson added.
He said AutoFinance Group's president and chief executive, A.E. Steinhaus, and chief financial officer, Blair Nance, will remain with the company, in Mr. Myerson's consumer banking group.
Under the terms of the agreement, AFG common shareholders will receive Keycorp common stock valued at $16.50 a share for each AFG share.
The terms require that Keycorp's stock price cannot fall 50 cents a share or rise more than 60 cents a share. In afternoon trading Monday, Keycorp's stock price was down 62.5 cents to $28.375.
The transaction is expected to close by the end of October, pending shareholder and regulatory approvals.
AutoFinance Group said it will spin off to its shareholders 95% of its stock in Patlex Corp., a wholly-owned laser technology subsidiary.
Meanwhile, Keycorp executives are scheduled today to present their five- year corporate strategy to analysts in New York.
Some analysts did not expect the bank to announce it was moving into the low end of its already highly profitable automobile finance business.
"With investment management products and the way they tried to position themselves there," Keycorp followed a kind of high-end strategy, said Nancy Bush, a Brown Brothers Harriman & Co. analyst. "I thought that was going to set the tone for the operations as a whole. The AutoFinance move "is kind of a departure."
Mr. Myerson said he expects to acquire other companies like AFG.
Keycorp has $4 billion of indirect auto loans on its books, making it one of the top five noncaptive lenders in this $35 billion business, Mr. Myerson said.
Mr. Coffey expects that because Keycorp paid "going concern price" instead of "liquidation values," this deal will likely "open the door of a hurricane of deals" by other banks to acquire sub-prime auto lenders.
