People's United: Expanding into Equipment Leasing

Includes: FIF, PBCT
by: Rubicon Associates

People's United Financial Inc. (NASDAQ:PBCT) agreed to acquire Financial Federal Corp. (NYSE:FIF) in a stock-and-cash deal valued at $718.5 million, increasing its presence in the equipment finance sector.

Under terms of their agreement, Financial Federal shareholders will receive $11.27 in cash and one share of Bridgeport, Conn.-based People's United common stock, valuing the transaction as of Friday's close at $27.74 per Financial Federal share, a 35% premium.

President and Chief Executive Philip R. Sherringham said Financial Federal's equipment-financing business would complement its People's Capital and Leasing unit, PCLC, and add to earnings without diluting its capital ratios.

"Outside of the transportation sector, there is virtually no overlap between Financial Federal's focus on construction and refuse, and PCLC's focus which, historically, has been on printing and packaging," Sherringham noted. "Moreover, this transaction offers opportunities for People's United to grow our highly-profitable equipment financing business with established, experienced staff in new markets throughout the country. Our combined portfolio will rank us 13(th)among U.S. bank-owned equipment finance businesses, according to data from Monitor, an industry publication."

Essentially, PBCT is buying surplus capital (should be accretive to PBCT's tangible capital levels - Moody's assessment of capital calculations notwithstanding) and the ability to participate in economic growth outside its traditional region. While bank purchases of finance companies has not traditionally been a good bet, this may work given PBCT's nearly zero cost of funding due to their retail deposits. The price paid seems a little rich given FIF's 55% concentration in the Southeast and Southwest and the 80% of business generated from transportation and construction (here's the economic growth play).

Disclosure: No positions in either company.