Encore Capital Group' Management Hosts Special Announcement Call (Transcript)

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 |  About: Encore Capital Group Inc (ECPG)
by: SA Transcripts

Encore Capital Group Inc (NASDAQ:ECPG)

Special Announcement Call

May 30, 2013 9:00 am ET

Executives

Adam Sragovicz - Director of Finance and Treasury

Kenneth A. Vecchione - President and Director

Paul J. Grinberg - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

David M. Scharf - JMP Securities LLC, Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Hugh M. Miller - Sidoti & Company, LLC

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Special Announcements Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Director of Finance and Treasury, Adam Sragovicz. Please go ahead.

Adam Sragovicz

Thank you, Operator. Good morning and welcome to Encore Capital Group's Special Announcement Call. With me on the call today are Ken Vecchione, our President and incoming CEO; and Paul Grinberg, our Executive Vice President and Chief Financial Officer. Ken and Paul will make prepared remarks, and then we will be happy to take your questions. Please note that we will use slides as part of our presentation today, which can be accessed by logging on to the Investors section of our website at encorecapital.com.

Before we begin, we have a few housekeeping items. Throughout the call, we will use forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you against placing undue reliance on these forward-looking statements, which speak only as of the date they are made. We will also use rounding and abbreviations in our conference call for the sake of brevity. For more detailed numbers and explanations, please refer to our Form 8-K that will be filed later today with the SEC.

We will also be referencing both GAAP and non-GAAP financial results. We believe certain non-GAAP financial measures provide useful information about our business. However, the presentation of this additional information should not be considered an alternative to, or more meaningful than, our results prepared in accordance with GAAP. Management utilizes adjusted EBITDA, which is similar to a financial measure contained in covenants used in our credit agreement, in the evaluation of our operations, and believes this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. We included information concerning adjusted operating expenses, excluding stock-based compensation expense, in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented.

Once again, please be sure to see our Forms 10-K, 10-Q, and other SEC filings, including a press release issued as an exhibit to our Current Report on Form 8-K filed today for a more complete discussion of these factors and other risks. As a reminder, this conference call will also be made available for replay on the Investors section of our website, and we also plan to post the prepared remarks following the conclusion of this call.

With that, let me turn the call over to Ken Vecchione, our President and incoming Chief Executive Officer.

Kenneth A. Vecchione

Thank you, Adam. Good morning, everyone, and thank you for joining us today. I am very pleased to announce that Encore is acquiring a controlling stake in Cabot Credit Management. With this deal, we are uniting 2 market leaders to bring in new level of expertise and efficiency to the U.K. debt buying market.

Encore has been looking to enter the U.K. market for a long time. We targeted the U.K. for several reasons:

First, the U.K. market is large and is projected to continue to have robust growth. It is the second largest debt purchasing market after the U.S. Banks have a significant backlog of defaulted consumer debt generated by the financial crisis and this debt is expected to come to market in the next few years. U.K. banks are under pressure to de-lever their balance sheet as defaulted receivables grow and the regulatory scrutiny increases. Today, more so than any time prior, the economics of debt sales are highly compelling. In fact, one of the large U.K. issuers is currently marketing a file in excess of GBP 1 billion.

Second, the U.K. provides favorable operational conditions with a transparent regulatory environment and attractive portfolio returns.

Finally, we believe we can leverage Encore's capabilities and analytics, as well as our efficient operating platform, including our call center in India.

This deal is an example of why I came to Encore and what I respect about Encore's management team. In fact, during the period, when I was talking to Encore about joining as CEO, I spent an extensive amount of time with Paul and the Board discussing the Cabot opportunity. As I learn more about the U.K. market, Cabot's position in the market and its management team, I became convinced that this opportunity was a good fit for Encore.

Encore was careful about selecting a partner in the U.K. and we waited until we found the perfect opportunity. In terms of selection criteria, first, we were looking for a market leader. Cabot is the market leader, as defined by revenue in the U.K.

Second, Cabot focuses on acquiring portfolios where a significant percentage of the consumers are already in repayment, which they refer to as semi-performing debt. These portfolios are a growing part of the market and attractive due to their highly-consistent annuity-like revenue streams and ability to generate cash from the outset. In 2012, 60% of Cabot's debt purchases were in the semi-performing paper.

Third, we wanted to ensure that the management team was topnotch. Cabot's management team is extremely experienced and skilled. Neil Clyne, Cabot's CEO, and his team are responsible for Cabot's leadership position in the market today. Cabot's management team has the same philosophies that we have. They rely on decision science models to increase account manager yield, while simultaneously focusing on delivering efficient operations, which has enabled them to expand their operating margins in the last few years. They do all this while adhering to their respect-to-consumer philosophy, which is similar to our Consumer Bill of Rights. Finding a company that shares our same principle intent was also paramount to us. We look forward to working with them to continue to drive Cabot's growth. Neil will be at our Investor Day next week in New York and looks forward to meeting with you and talking about the business.

Fourth, we already see several ways in which we can leverage Encore's strength and analytics and use of our efficient operations to enhance U.K. collections. For example, overtime, Cabot will be able to use our idle daytime capacity in our India operations. Like in the U.S., we expect to be able to leverage India to support future growth, without impacting the jobs of Cabot's current employee base in the U.K.

Finally, we wouldn't be able to finalize this deal without the partnership -- without the partnership with JC Flowers. The joint investment has allowed us to acquire a leading player in the U.K. at a favorable price. The JC Flowers partnership creates a manageable deal size for us and minimizes our funding leverage. It is our intention to purchase the remaining company in the future.

We are excited to enter the promising U.K. market, which is the second largest debt purchase market in the world. The market has grown substantially since 2009. After the retrenchment during the financial crisis, it is now back to precrisis levels. We also expect this market to grow in the future as more debt that was not sold during the crisis comes to market.

Like in the U.S., debt collection is not a core activity of the banks. Managing various debt collection agencies is administratively expensive and requires oversight and audit. The current regulatory environment has limited settlement activity and has opened the door for debt purchases like Cabot who can offer greater value to the banks by purchasing their defaulted receivables, reducing administrative overhead and assisting them in de-levering their balance sheet.

Cabot is the leading player in this market. It has over 14 years of strong collection growth and has operations in both Great Britain and Ireland. Cabot specializes in semi-performing debt. An attractive characteristic of this type of debt is that it has a longer, steady repayment cycle so we can expect a stream of payments over time and don't have to deploy as much capital to maintain Cabot's ERC.

Cabot's core business is very strong with GBP 7.7 billion of debt acquired since 1998, for approximately GBP 706 million and it currently has an ERC of GBP 934 million. In the last fiscal year, purchased more debt than any of its competitors.

Cabot has also consistently delivered strong collections and adjusted EBITDA growth. Its 2012 collections were GBP 161 million, a growth of 17% annually from GBP 119 million in 2010. Its adjusted EBITDA was GBP 111 million, a growth of 27% annually from GBP 69 million in 2010.

Before I turn it over to Paul, I want to answer what I'm sure will be one of your first questions. Given our asset acceptance transaction, which is expected to close on June 13, is this too much for Encore to be doing? I've spent a lot of time thinking about that and discussing that with our management team. While there will be a lot of work involved, I want to assure you that we are confident in our ability to execute this transaction. Keep in mind, there is nothing we need to do to immediately to achieve our goals and financial returns. Cabot is the leader in its market. It has a very strong team and continue to grow -- and can continue to grow profitably. Cabot will continue to operate as an independent entity and initial synergy value will come from knowledge transfer. Our operations and analytics teams will focus on the asset acceptance acquisition over the first few months and Brandon will continue to support us by participating on our asset acceptance integration steering committee. Once the Cabot transaction closes, we will work with their teams to methodically assess and prioritize which synergy opportunities will generate the most value.

While there will be more work than normal, this is a great opportunity for Encore and will provide a meaningful contribution to earnings over the years to come. We want to make sure that we capture that value for our shareholders.

And with that, I will now hand it over to Paul Grinberg, our CFO, who will provide you with some more details about this transaction. Paul is at Cabot's headquarters in Kent, just outside of London, welcoming the Cabot team to Encore, while I am in San Diego to share the details of the transaction with Encore's employees. Since we are in different locations, please bear with us when it comes to Q&A section, as we may not be as seamless with hand-offs as we would be if we were in the same room. Paul, I'll turn it over to you.

Paul J. Grinberg

Thank you, Ken. We are very excited that Encore will be acquiring a controlling stake in Cabot. The company will be jointly owned by Encore, JC Flowers and the Cabot management team.

To give you a little background, JC Flowers closed their acquisition of Cabot on May 15. We partnered with JCF a few months ago to undertake the diligence on Cabot. We had not finalized our deal with JCF when bids were due, so they completed the Cabot acquisition on their own. Now that our deal with JCF has been finalized, we will be purchasing 50.1% of their stake. I will discuss the ownership structure of the company in more detail later.

Just to avoid any confusion, our relationship with JCF will be at the Cabot level and JCF is not an investor in Encore.

We will be the single largest shareholder in the company and control 6 of the 10 Board seats. We will consolidate Cabot in our financial statements.

As Ken discussed earlier, our return does not factor in any of the synergies that we anticipate creating together with Cabot. We expect the transaction to close in the third quarter of this year. Excluding deal costs, the deal will begin contributing positive net income immediately.

Looking ahead, we have created a mechanism to acquire the remaining ownership interest in the company between 4 to 6 years after the closing.

The structure of the deal consists of several different types of securities. It was developed to optimize our return, as well as insure that we could consolidate the company. We will invest close to GBP 128 million to acquire our ownership interest in Cabot. What we will receive in return is 3 types of securities. 18% of our investment is in a security called Bridge Preferred Equity Certificates or Bridge PECs. This security will allow us to return close to GBP 23 million of capital within the next year, which would reduce our investment in the transaction and increase our investment returns. Any redemption of Bridge PECs, will be within the extent permitted by Cabot's existing bond covenants.

Around 75% of the investment is in a security called Preferred Equity Certificates, or PECs. These PECs are an accumulative annual preferred return of 12% prior to any distribution to common shareholders.

Finally, approximately 7% of the investment goes towards Class A common stock, which gives us a 42.8% of the incremental economic returns generated by Cabot above our 12% preferred return.

If the Bridge PECs are not redeemed, they will be converted into PECs and Class A common stock in a similar ratio to what I just described.

Stepping back from the nitty-gritty terms of the deal, we also see significant future upside beyond what we accounted for in our valuation. Encore provides Cabot with several opportunities for synergies that we plan to focus on overtime.

First, there will be opportunities to further enhance Cabot's analytics by transferring knowledge from Encore's highly-developed analytics platform to drive heightened consumer insights that can enhance collections.

Second, Encore's ability to successfully leverage our operations in India has been a key driver of our competitive advantage. The time zone and language benefits for the U.K. suggest that we can use our call center and back-office capabilities to enhance Cabot's operations as well.

Finally, we plan to leverage Encore's experience in secondary and tertiary debt to pursue new investments in the U.K. In addition, we plan to leverage Encore's strong financial relationships and access to capital to facilitate larger debt purchases.

We are confident that this acquisition will be a vehicle to continue Encore's strong earnings growth. Encore will deploy capital in a growing market that will generate a strong return on investment.

In terms of next steps, we plan to complete this transaction by using excess availability under our current credit facility, and also by raising some additional debt. We expect to have that financing completed over the next couple of months and the transaction to close in the third quarter.

Given both the Cabot acquisition and the asset acceptance acquisition, 2013 will be a particularly complex year to model. Accordingly, I will provide you with some 2013 earnings guidance.

Consistent with our past practices, we do not plan to give earnings guidance in the future, but with all the moving pieces this year, we want to be as helpful as possible. Excluding one-time transaction and integration cost, which are yet to be finalized, and the noncash expense associated with our convert, we expect to report earnings per share for Encore of between GBP 3.50 and GBP 3.60.

Our business model was built on raising capital efficiently and deploying that capital to generate very strong returns. We do this based on our superior analytics and cost advantage. We have consistently raised capital at low rates and have demonstrated that raising capital has never been a constraint to our growth. Once we raise that capital, we deploy it in a way that we are confident will generate profitable returns and an EPS growth rate of 15%. We deploy our capital in 1 of 5 ways: We buy portfolios from issuers, we buy portfolios from competitors, we buy the entire company like we are doing with asset acceptance. The 2 options I just mentioned are, of course, more complicated than the first, so we pursue them only if the returns are substantially higher than buying directly from issuers.

Another way we deploy capital is through our moves into adjacent asset classes or geographies, like we have done with Propel and are doing with Cabot. Lastly, we always consider returning capital to shareholders through share repurchases, like we did at the end of last year at a price that was 20% lower than our current share price. We use these 5 levers together to deliver strong, profitable returns to achieve our 15% long-term EPS growth rate.

Thank you for joining us today. We will now open up the line to take your questions. As Ken mentioned, we are in different locations, so please bear with us. Operator, please open the line.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Scharf from JMP Securities.

David M. Scharf - JMP Securities LLC, Research Division

Ken, I wanted to start off just about your kind of broad comment that there still is a lot of charged-off paper residing at U.K. banks that's yet to be sold. Can you just talk a little bit about sort of where in the, I guess, post-financial crisis chronology that the U.K. banks are relative to the U.S. banks? I mean, obviously, a lot of charge-offs over the last 3 years have been punted by U.S. banks. Has more been retained on a relative basis in the U.K.?

Kenneth A. Vecchione

Yes. So let me take you a little bit through the history here. From 2002 to 2008, the market grew rapidly. It moved from $1 billion of -- GBP 1 billion I should say of purchased volume to about GBP 8.5 billion, and that was attributable to the rise in the consumer debt, increasing default rates and the willingness of banks to outsource a lot of their collections. And a number of large well-funded debt purchases were in the market from '02 to '08. From 2008 to 2010, the market contracted, right? So the collectibility of debt suffered. As the economy went into a recession, many DPs didn't have the ability to understand how to collect during a recession, and also, their funding began to dry up. So hence, the balance sheets of the banks began to increase. From '10 to the present, I think sellers now have adjusted their pricing expectations to understand what they can get from the market. There is funding that came back to the market for the debt purchasers. Debt sales are increasing. As I mentioned, there is one very large issuer that's coming to market with a GBP 1 billion portfolio. And banks now are also focusing on reputational risks, they're focusing on de-levering their balance sheet, even though they marked down these receivables, there is still a capital charge for the semi-performing debt that's on their balance sheets and they would like to get rid of those as well. And I'll come back and say that there is the spent of monitoring this yourself or even giving it to debt collection agencies before you give it to debt purchasers, and that is an administrative expense that they can move away from. They don't have the oversight, they don't have the compliance or the audit expense associated with that. So some stuff that I've read indicates that, that market can grow about 9% per year. We think that's a pretty healthy number and we're happy to be joining Cabot there and being -- participating in that robust growth going forward.

David M. Scharf - JMP Securities LLC, Research Division

Got it. That's helpful. And can you perhaps update us on whether there are any regulatory issues overhangs that's impacting the U.K. collection market right now, like there is in the U.S.

Kenneth A. Vecchione

Well, the U.K. market is a little bit more transparent. And by that, I mean, in the states here, for every state, you've got a regulation you've got to deal with. In the U.K. market, it's a little more simpler than that. Most things are run by the OFT, which is the U.K. Office of Fair Trading. What's really different, I think, in the model -- in the U.K. versus the U.S., is that the U.K. model, the regulators have sought an open dialogue with debt purchasers and they have actually sought out Cabot's views on policy matters affecting Cabot and the industry and they give Cabot an opportunity to engage and influence the debt collection policies and guidelines. And I think that is really the biggest difference between the U.K. market and U.S. market. But as it relates to Cabot, I'll just say that Cabot is all -- at the core of Cabot's policies and procedures, is the fair treatment of all consumers and Cabot takes that very, very strongly. And that's one of the things that attracted us to them, that we share that same philosophy.

David M. Scharf - JMP Securities LLC, Research Division

Got it. And just shifting to the collections side, are all of the collections in the U.K. call center-based? Do they have the same legal recourse and legal channel that we do in the U.S.?

Kenneth A. Vecchione

Their legal channel is not as robust as ours, it's mostly collections-based. And they have 3 sites, 2 in U.K. and 1 that's in Ireland. Paul, do you want to add anything else to that?

Paul J. Grinberg

Yes. Unlike our mix, which is weighted relatively equally between internal call center collections and legal collections, 95-plus percent of the collections here come from the call centers. And in the market, in general, most of the collections are not legal-based. There is a framework with which to do it and is recourse through the legal channel. And that's something that we will certainly explore. But it's something that we'll look at and consider slowly. But the opportunity does exist, David, to be able to generate incremental liquidation through litigation.

David M. Scharf - JMP Securities LLC, Research Division

Got it. And then last question, I'll get back in the queue. Just want to make sure I understand that the semi-performing or kind of partial payment. Are these charged-off receivables in which the consumer is already on some kind of payment plan already? Or is it just kind of a definitional thing where they've made some payment in the last 30 or 60 days? Can you give us a little more color on just how performing these assets are?

Kenneth A. Vecchione

Yes, they are -- this is already a charged-off paper. And there's a -- the U.K. regulations regarding forbearance is that you cannot have people to pay more than that within what they are capable of paying, and there is a stream of payments that are attached now to this defaulted debt versus maybe higher settlements that are done upfront in the U.S. market.

David M. Scharf - JMP Securities LLC, Research Division

Okay. So are these mostly consumers that have already agreed to some sort of payment plan, if you will?

Kenneth A. Vecchione

Yes.

David M. Scharf - JMP Securities LLC, Research Division

Similar to maybe Chapter 13 performing paper in the U.S.?

Paul J. Grinberg

It's a little bit different than that. I mean, they've made a payment and they -- what happens when these debts are acquired is companies like Cabot have built the expertise to know how much these individual consumers can actually pay every month. The banks don't have as much expertise in determining can consumer A afford to pay GBP 100 or GBP 50 a month or GBP 5 a month, and so sometimes the banks aren't able to develop the plan with them that maximizes the value capture. And where Cabot's developed expertise is really understanding these consumers and understanding their -- how much they can afford to pay and working with those consumers to get them on a plan. And if they already are on a plan, when the debts are acquired from the bank, they keep them on that plan and reduce any leakage once the accounts are transferred from the issuer directly to Cabot.

Operator

And our next question comes from the line of Bob Napoli from William Blair.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

You guys have been busy this year in many ways. Cabot's -- I mean, I think Cabot, from we know, is pretty good business. And I think you said and clarify maybe if the management team's staying on Board, the entire management team at Cabot?

Kenneth A. Vecchione

Yes, they are.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. And maybe the process and I -- so JC Flowers closed the deal a few weeks ago. Have you been working closely with JC Flowers over the last several months? Or how is this actually transpired? Obviously, I know you have a close relationship with JC Flowers?

Kenneth A. Vecchione

Now, we've been working with them close over the last several months. In fact, Paul, why don't you take this question. The history predates me on how long ago we've been working with them?

Paul J. Grinberg

Sure. This process -- the Cabot process started at the tail end of last year, the beginning of this year. And we -- as we've talked with you, Bob and others, in the past about our plans and thoughts around geographic diversification, the U.K. was a market that we have been tracking for a long period of time. And we had looked at probably every company in this space, and we knew that the Cabot opportunity would come up at some point, so we were very eager to participate in that process. Given the large size of that -- of Cabot, we wanted to do it in more of a bite-size. And so, as we were taking about the process and working with the bankers who were running the process, we decided that it made most sense for us to partner with someone to complete the acquisition rather than doing the entire thing ourselves. And having worked with the team at JC Flowers in the past, and knowing their expertise in this space and their interest to continue to invest in our space, we partnered with them early on. We conducted our diligence jointly with them. We retained the same advisors as they did. So we truly were working from the beginning through this date, through yesterday when we signed the deal with them, on the entire process. From a timing perspective, as you mentioned right from the beginning, we've been busy, we've been working on asset acceptance and doing a lot of work there, getting ready for the closing of that transaction. And so we hadn't finalized our deal with JC Flowers when the bids were due, so we agreed with them that they would bid on their own and they would go to the extent they got through, which they did, they would continue to go through the process as we work with them to finalize our deal with them. Our deal with them got finalized and signed yesterday, but we were part of -- we are working together from the get go on this one.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Do you -- can you-- do you have any other metrics on valuation? I know you gave us the total estimated collections, but do you -- I mean, do you have a pre-tax and the EBITDA numbers, but do you have a pretext number? EBITDA can be a little tricky in this industry. Like the pre-tax earnings for last few years or the net income or the operating income number or the operating margins. And do you have any other metrics you can give us?

Paul J. Grinberg

I think, Bob, the -- in this industry, you're right, the EBITDA number is tricky. But this one's -- the pre-tax and the operating income numbers are even a little trickier because there are differences between U.S. GAAP and U.K. GAAP, because U.K. GAAP accounts for the business in a different way than we do in the States. And so, to -- that's why we thought that most important metrics to communicate were the ERC, because at the end of the day, we are buying a portfolio that's going to generate an excess of GBP 900 million of collections. The cost-to-collect of Cabot, given that it's, a, there's very little litigation is in the mid-20% range. That'll give you some sense of what the net collections are going to be. And the cash flow is -- the adjusted EBITDA, which is reflected in cash flow, is not subject to either estimates or U.S. GAAP or U.K. GAAP, it's truly the cash flow of the business. So I think that we looked at it based upon the cash flow of the business. Now, what it's going to generate in the future, the existing book, the amount of capital we could deploy going forward and then what our return is going to be based upon that investment.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay, and maybe a little comment...

Paul J. Grinberg

Sorry, about -- one last thing. The Cabot does have publicly-traded bonds, and so they do have a publicly-reported financial. So you can go out and access that information if you want to. I would just caution that there is difference between U.S. GAAP and U.K. GAAP. And we will be pretty -- we will have purchased accounting associated with the transaction. So what happened in the past is not necessarily reflective of what's going to happen once we put in place our purchase accounting adjustments.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

And then just a question on pricing as -- so when you talk about a GBP 1 billion portfolio that's on the market, I mean you generally -- is the pricing ten cents on the dollar generally in the industry there? Is it range from 2 to 10? Or what -- can you maybe kind of give some feel if you were to buy a portfolio that size generally with the range of pricing could be something? And is the -- what has the competition on pricing been there?

Paul J. Grinberg

So the -- a portfolio like this particular one will actually be split into different segments. Some of them will be the semi-performing segments, which can describe. The others will be older paper, lower balances and where Cabot is likely to bid is on the semi-performing space. The semi-performing space, these are consumers who are in payment plans or have made payments. And with payers just like in the United States, the price that's paid is more. So depending upon the frequency of the payments and the amount of payments, the prices could range from the higher single digits to the teens and sometimes even above. The older paper and the lower balance paper will trade at low-single digits. So it really depends -- like in the States, the volume of payers, the size of the payments as it relates to the face value of the debt, the age of the debt and the balance of the debt, and it ranges from low-single digits or sometimes a pence on the pound, all the way up to the mid-teens and beyond.

Operator

And our next question comes from the line of Hugh Miller from Sidoti & Company.

Hugh M. Miller - Sidoti & Company, LLC

The first one is I know in the past, you guys have kind of talked about a 15% to 20% earnings growth target over time. It seems like with the geographic diversification of this business, improving your ability to deploy capital, is there any reason why you guys, I think, now are kind of focusing on a 15% growth rate as opposed to the prior kind of target?

Paul J. Grinberg

Hugh, like we do with when we set expectations around future collections and establish our accounting curves, we try to be cautious on setting those expectations and our goal is to over perform. And we did the same when trying to set guidance from an earnings growth perspective. So our -- we believe 15% growth is a very solid number. We're committed to delivering it long-term. And hopefully, as we do with our performance on collections, we'll beat it.

Hugh M. Miller - Sidoti & Company, LLC

Okay. And I guess as I look at things initially here on a remaining collections to purchase times multiple, it seems like, if I'm calculating correctly here, you're looking at somewhere close to about 3.5x multiple on this particular transaction for the business in its entirety. You gave some commentary about kind of the net returns of terms of the business, the cost-to-collect, that it's primarily a call center. But can you just talk about what, I guess, the typical pricing is there in the U.K. In the U.S., obviously, you guys have talked about 2.5x to 3x PPA multiples. How does that compare?

Paul J. Grinberg

So the multiples here are generally in the 2 and -- 2x to 2.5x, but there are 2 factors to also consider. One is the cost-to-collect, which for Cabot today, is in the low- to mid-20. So the cost-to-collect is a lot lower than it is in the United States. And also for those of you who've done business in the U.K., the tax rate is also quite a bit lower than it is in the U.S. with today, it's 23% and based upon some changes that have already been approved, it will decline to 21% and down to 20% over the next year or 2. So there are other factors on the cost side and expense side that need to be considered when looking at the multiples.

Hugh M. Miller - Sidoti & Company, LLC

Got you. Okay. So am I looking at things incorrectly with the ERC, the purchase price multiple? It seems like it's in the mid-3s. I mean, is there something I'm not looking into there? Or have a reason why it's so high?

Paul J. Grinberg

The ERC here, because of these payment plans that have -- the semi-performing debt, the payment plans are typically a lot longer than they are in the United States. And so the cash flows come in over a longer period of time. So that's one of the reasons the multiple's higher. And so when I gave the number that the multiple, I'm not looking at a life multiple where -- I'm looking at a shorter-term multiple. But if you look at it over the life, there are -- there are payment plans that extend beyond the 7-year curves that we typically use in the United States. Some plans go to 10 or even 15 years. So the cash comes in over a longer period of time. But when you factor in how much you deploy, what you collect and what it cost, the IRRs are very good, they're better than they are that we see in the United States right now.

Operator

And our next question comes from the line of Mark Hughes from SunTrust.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Paul, to your last point, is there kind of a weighted average number in terms of the payment plans, your after cash comes in on 3 or 4 years, understanding that some of them can be longer. How do they compare on average to your U.S. payment streams?

Paul J. Grinberg

It's -- they're definitely much longer and flatter curves. So they'll -- if you look at our curves, we'll collect the bulk of our collections in the first couple of years. And then it declines pretty significantly thereafter. Given the nature of the debt we're buying here, the curve is relatively flat and can go out for 7 or 10 years with a relatively flat curve. So it is much longer. I don't have the exact average, the weighted average of length of typical arrangement. They're all very different. But it's longer and flatter. Which is one of the things that's very exciting to us, because when you do have curves that look like these, and you can see a lot of this from the various -- the bond documents in the financial statements. You can see that -- you don't have to deploy a lot of capital to be able to replace collections coming from your ERC. So today, Cabot would only have to deploy GBP 40 million a year to maintain their ERC. So when you do have these long payment streams, it doesn't require a lot of deployment to maintain that.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

So is that to say, if you put more capital to work there, it will build up quickly?

Paul J. Grinberg

That's our expectation, yes.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

All right. About the carrying values for the portfolios, when we see our balance sheet after this transaction, how much of the purchase price or how much of the value of this is going to be in the portfolio versus the operating company?

Paul J. Grinberg

They'll definitely be a significant value attributed to the portfolio. We haven't finalized the purchase accounting yet, and so, I can't give you an exact answer. But with GBP 900 million of ERC, there'll clearly be a significant value attributable to the portfolio. But the platform is a very valuable platform, so I'm sure there'll be value ascribed to that as well.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

All right. How much -- can you describe the accounting here. Is the accounting similar? You've just got a fired collections profile, but you still do a level yield accounting or is there, I mean, the difference in the way these are accounted for?

Paul J. Grinberg

There is a difference in the way they're accounted for, but when we report, we'll be translating the financial statements from U.K. GAAP to U.S. GAAP. And so for reporting that we have, it will be the same level yield accounting. So we'll have an opening balance sheet, which will reflect the fair value of the assets acquired and liabilities assumed. And then we will treat that, the book value of that portfolio using purchased accounting, and any subsequent purchases going forward, we'll account for it using accretion like we would. I mean, Cabot will continue to report in U.K. GAAP here, but in the U.S. and on-course consolidated financial statements, we'll be reporting using accretion accounting in U.S. GAAP.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Right. And then is there an opportunity -- you might have referred to this earlier. Is there opportunity for these collections to be shifted over to India?

Paul J. Grinberg

Yes, there is. But the collections that will shift to India will be the older -- so right now, Cabot is focused on semi-performing paper, which we talked about. And they do have some tertiary and some older paper that they're just not as effective at collecting as they are with the fresher paper. So that older paper, there'll be an opportunity to move some of that over to India over time. And then as we apply some of our analytics to Cabot's models and we're able to make the older paper and lower balance paper more of a strategic purchase opportunity for Cabot, the incremental purchases, we believe, we'll be able to generate will shift over to India from a collection perspective as well. I think it's important to note that like in the United States, when we established our India call center, we used it as incremental collections. Our collection workforce generates a lot of strong collections and it's impossible to replace a collector without losing a lot of collections. So like in the United States, India provides an opportunity for us to lower our costs and actually build more jobs in our markets in the U.S. than in the U.K., rather than enabling us or having us shift jobs from the U.S. or U.K. to India. As we plan on keeping the workforce here as we did in the U.S., but moving incremental collections coming from the existing older paper, as well as from incremental purchases to India over a period of time.

Operator

And our next question comes from the line of David Scharf from JMP Securities.

David M. Scharf - JMP Securities LLC, Research Division

Just one follow-up question and maybe recent financial performance, without necessarily digging into specific numbers, Paul. You gave us a sense for how collections in EBITDA kind of trended recently. Can you give a little color on the margin front and whether they've been flattish, improving over the last few years. Whether there's been any specific productivity initiatives undertaken?

Paul J. Grinberg

There absolutely have been. They've -- Cabot has made some meaningful investments in people on the analytics side and on the decision science side, and so, margins have been improving. They have gotten more efficient, and that's one of the benefits we see to this acquisition. We do -- we had some of our decisions science and operational analytics teams here as part of their due diligence. And we see some great opportunities to make driving further efficiencies into the good work that they've already started here.

David M. Scharf - JMP Securities LLC, Research Division

Got it. And then just lastly on the accounting. Following-up on the last call, I guess. To the extent you're going to be translating the U.K. accounting into level yield here in the U.S. Are the Cabot, both existing and future portfolios, going to be kind of segmented out almost as different vintages? Is it all going to be kind of consolidated once things are closed and kind of get lost in sort of annual purchase volume?

Paul J. Grinberg

We're going to certainly consolidate the financial statements, but given the size of the operation there, we anticipate that this will be treated as a separate segment. And we will endeavor to be as transparent as we can in terms of communicating how our purchasing volume here and domestically.

Operator

[Operator Instructions] Our next question comes from the line of Bob Napoli from William Blair.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Can you tell us what the formula is for your option to buy the remaining ownership of Cabot in 4 to 6 years?

Paul J. Grinberg

Sure. It's -- I won't get into all the gory details, but effectively, there is a -- will be a requirement for JCF to offer us their interest at a price and we have the option to either accept that price, if -- or counter and they can accept our counter if they want to. If we don't accept their price and they don't accept our counter, they can offer it in the market. If they get a lower price, we have the right of first refusal. If they got a higher price, they can sell.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. So there's no formula then, it's just the negotiation?

Paul J. Grinberg

There are no puts and calls. There's no obligation on our balance sheet. We're not -- it's a -- we -- effectively, it's been set up in a way that we can acquire the remaining interest at fair value, which is the deal that we've been working on with JCF for a while, is create an opportunity for us to buy out the entire company, which has always been our goal, at a fair price.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. And do you have to -- how much paper did Cabot purchase, let's say 2011, 2012? And what is your outlook for purchases? I mean, what are you thoughts around the purchases that Cabot will make in 2013, '14?

Paul J. Grinberg

Together with its previous owner, AnaCap, Cabot deployed about GBP 130 million last year. And we expect the number to be a little bit higher this year. And we'll share more about our purchasing strategy at our Investor Day next week. That's one of the things we always try to highlight, as what we expect purchasing volume to be in our various businesses. So we'll share more about that next week.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. And the -- are you looking at using this Cabot platform to enter new European markets? Is that part of the -- was that part of the analysis...

Paul J. Grinberg

The answer is, probably, but right now, we have enough in front of us between asset acceptance and Cabot. That's an interesting question. We'll kind of delve into that later on. But [indiscernible] fall for these deals underneath our belt before we could think along those lines. Plus, I think one of the similar market characteristics of the U.S. and the U.K. is this consolidation rollout that's happening. And we probably see Cabot being in a position to do more of that first before we start going off into different countries. But it will be the platform and it is our beachhead to go into Europe.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. So you see the opportunity to do the same thing in the U.K. that's happening here in the U.S, to consolidate that market buying the other debt buyers?

Kenneth A. Vecchione

Yes.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Portfolios of other debt buyers?

Kenneth A. Vecchione

Yes.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. And then from a technology perspective, I mean I think Cabot has pretty well-developed technology, but is there -- are you -- is the plan to go to one technology platform over time?

Kenneth A. Vecchione

No. Cabot is going to be run independently and they're going to continue to work on their technology platforms that they have today. They've just recently put in about GBP 6 million into technology to improve decision science and so forth. So they're going to stay on their own platform.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

And then why isn't Cabot doing some agency business, collecting for third parties? Was that part of what you acquired, or...

Kenneth A. Vecchione

Yes, that's part of their Apex brand, it's a smaller piece of Cabot and it does give them a leg up when bidding on portfolios since they already have a sense of what the collection attributes are of a particular portfolio. But the bulk of what they do is in the debt purchasing arena.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

And the pay for the Apex brand, what it's collecting, is it -- it's collecting for other debt buyers. Does that cause a conflict for Apex?

Kenneth A. Vecchione

No. I think they're buying -- they're collecting mostly for other issuers.

Operator

And our next question comes from the line of Mark Hughes from SunTrust.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

I apologize I was -- I had -- or I was cut off a little bit earlier, but I did get the [indiscernible]. The GBP 111 million adjusted EBITDA, was that -- again, was that calendar 2012? And how much of that was the portfolio amortization?

Paul J. Grinberg

So yes, that was calendar 2012. I don't have the breakdown in front of me of how much that -- of that collections. But those are cash collections. I don't have the amortization number in front of me. Keep in mind that with a longer, flatter curve, the amortization is typically a little bit lower than it is for our core business.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

And if you do 3.5x collections multiple, that would lower the amortization as well?

Paul J. Grinberg

I'm not sure I understand your question Mark.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

I guess I was observing that if we expect the remaining collections, that was 3.5x, that would mean it's lower amortization?

Paul J. Grinberg

That's right, you're referring to the purchase price?

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Yes, yes. All right. Okay. All right. And you said you'd need about a $40 million -- or GBP 40 million investment to maintain the ERC. Would that be a reasonable proxy for amortization in that case?

Paul J. Grinberg

That would be a decent proxy for it.

Operator

And I'm not showing any further questions at this time. I would like to turn the call back over to management for closing remarks.

Kenneth A. Vecchione

Thank you again, for joining us today. We're pretty excited about this Cabot announcement, and we look forward to talking to you and seeing you in a couple of days from now in New York City. So once, again, thanks for joining us today.

Operator

Ladies and gentlemen, thank you for participating in today's for conference. This does concludes the program, and you may all disconnect. Everyone, have a great day.

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