Takeover speculation is running like wildfire in the consumer finance sector, fueled by cheap stock prices and a group of banks with acquisition capital to burn.
Advanta Corp., which has been the subject of merger rumors since it retained B.T. Wolfensohn to help it "explore options" following a disappointing first quarter, has seen its shares bob up and down in recent weeks with various acquisition rumors.
Aames Financial Corp., the Los Angeles-based home equity lender that specializes in the lower end of the credit spectrum, has been the subject of takeover talk for more than a month.
And most recently, analysts say home equity lender United Cos., Baton Rouge, is shopping itself around as a potential takeover target.
Whatever the rumor, observers agree that current market conditions leave the high profit-margin sector ripe for consolidation.
"Everyone is facing slowing loan growth," said Jeff Evanson, analyst at Piper Jaffray, Minneapolis. "You need loan growth to supply earnings, and there are two ways to do that - either organically, or through acquisition."
Share prices in the consumer finance sector have improved since a slump earlier this year. (See story on page 10.) But prices are still well below companies' former values, said Steven Eisman, analyst at Oppenheimer and Co., New York. "There will be some consolidation," he predicted.
Shares in Aames, which originated $1.169 billion of subprime mortgage loans in 1996, dropped precipitously this year after the company announced that it would be cutting down on its bulk purchases. Aames has been the subject of speculation ever since.
Washington Mutual Savings Bank, Greenpoint Financial Corp., Green Tree Financial Corp., and financier Leon Black's Apollo Advisors have been named as potential suitors.
Two weeks ago, some investment bankers had Aames Financial all but sold off to NationsBank Corp., but Wall Street sources late last week said that the talks had fallen through.
Aames chief executive Cary Thompson declined to comment on merger rumors.
Analysts are not ruling out the possibility that home equity and credit card lender Advanta, based in Spring House, Pa., may be sold off in chunks.
"If there is a surprise here, it's how well their mortgage company is doing," said Mark Alpert, analyst with Alex. Brown & Sons., New York. "It could be worth substantially more than investors may have suspected a year ago."
In fact, the entire company may not be sold off at all, he noted, because "Advanta expects a strong earnings recovery in the second half of the year - there may be a difference between what buyers are willing to pay and what Advanta thinks they are worth."
United Cos. made over $2 billion in home equity and manufactured home loans in 1996 through five channels.
The company's diverse origination methods leave it well-positioned to react to changing market conditions, analysts say, but earnings have fallen short of their target several times in recent quarters.
"They're always going to trade at a discount because of that," the chief executive of another home equity company said, adding that an acquisition may be the only way for shareholders to realize value.