Wachovia Corp.'s reported interest in the automobile finance company WFS Financial Inc. may be tied as much to its relationships with 8,300 dealerships as it is to any desire to bulk up in indirect auto lending, analysts say.
The $512 billion-asset Charlotte banking company is said to be one of several companies interested in acquiring WFS. The Irvine, Calif., company, which has a servicing portfolio of about $11 billion, is 84% owned by Westcorp, which also owns Western Financial Bank.
A wave of banking companies have been looking to bulk up recently in consumer finance. However, analysts said Tuesday that Wachovia's reluctance to pay a premium has already kept it out of one such transaction. It reportedly was interested in buying the Wilmington, Del., credit card company MBNA Corp. but backed away because of the price.
Bank of America Corp. signed a $35 billion deal in June for MBNA. A month later B of A agreed to buy up to $55 billion of retail automotive loans from General Motors Acceptance Corp. over the next five years.
G. Kennedy Thompson, the chairman, president, and chief executive of Wachovia, has repeatedly stressed that his company will evaluate a deal on its price and cost savings, with less emphasis on revenue-building opportunities.
Though Wachovia would not discuss a report published Tuesday in The Wall Street Journal that it is exploring a deal for WFS, Westcorp issued a press release Tuesday afternoon confirming that it is discussions "regarding a possible business combination." It did not identify any potential suitors.
Westcorp has been looking to buy the 16% stake in WFS it does not own, as part of a plan to convert from a federal thrift charter to a California bank charter to accommodate its growing automobile and commercial lending business. However, the Federal Reserve Board is taking longer than Westcorp expected to approve the conversion, and on Tuesday the company said that delay has prompted it to explore alternative solutions.
Westcorp has not shed any light on what is causing the delay, and a Fed spokesman would only confirm that it has received Westcorp's application. An analyst who is following the process, but requested anonymity, said the Fed could be concerned that WFS' high concentration of auto loans could mean increased credit exposure at Westcorp.
Shares of WFS rose 15.7% Tuesday, while Westcorp rose 12.5%. Wachovia's shares, meanwhile, slipped 0.41%. Judging by the stock price, analysts said Tuesday that a deal for WFS would be valued at $2.65 billion.
Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co. Inc., said he "wouldn't be surprised" if a company made a bid for Westcorp. Western Financial has $2.2 billion of deposits in southern California.
In an interview this month, David Stevens, Wachovia's dealer financial services executive, said that when it comes to auto lending, his company looks beyond indirect relationships with car buyers. It also relies on its ability to make loans and provide other services to the dealerships, he said in the interview, which covered banks' broad participation in the auto loan business.
"We manage our business from the standpoint of delivering the entire bank to the dealer," with an emphasis on products such as real estate loans, capital loans, and loans for buying other dealerships, Mr. Stevens said.
Jon Balkind, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc., said Wachovia could also market services such as cash management and insurance to auto dealers. "It becomes a better business over time than the indirect consumer relationship."
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said a possible deal for WFS may not be "just about the auto loans" that the buyer would inherit. "You can get involved with the dealers on other products."
Buying WFS would be consistent with Wachovia's current acquisition strategy, which is more tied to diversifying business lines than it is to buying a large retail bank, Mr. Fitzsimmons said. "I haven't heard them mention auto finance specifically … but it's not totally out of left field."
During a June 1 call with Prudential Equity Group LLC clients, Mr. Thompson said Wachovia would be interested in buying consumer finance companies "where we could bolt them to the businesses that we're already running and make them better."
Bankers have been talking recently about an unexpected upside to auto lending, since U.S. manufacturers have started offering pricing incentives rather than subsidizing their financing arms to move vehicles with offers such as 0% financing.
The shift has led to a spike in loan volume - this month the Commerce Department reported a 6.7% increase in July, the largest monthly increase in almost four years - at interest rates the banks can compete against.
"But I don't think the volume is sustainable," Mr. Stevens said. Auto lending remains "an extremely competitive industry."
Mr. Balkind and Mr. Fitzsimmons downplayed the idea that Wachovia is looking to enter the California retail banking market by acquiring WFS.
During the June call, Mr. Thompson mentioned California as a potential market for expansion, though he cautioned that such a move could be years away and would likely hinge on the success of branch-building efforts in Texas and Manhattan.
