Santander Consumer IPO Poised For Initial Success Despite The CEO's Outrageous Compensation

| About: Santander Consumer (SC)

Santander Consumer USA Holdings Inc. (NYSE:SC), a subprime finance firm, backed by Banco Santander, plans to raise $1.5 billion in its upcoming I.P.O. See S-1 here.

The Dallas, Texas-based firm will offer 65.2 million shares at an expected price range of $22-$24 per share. If the IPO can find the midpoint of that range at $23 per share, SC will command a market value of $8.3 billion. It should be noted that 100% of the shares being sold are insider shares, meaning that none of the proceeds raised will directly benefit the firm.

SC filed on July 3, 2013.
Lead Underwriters: Citigroup Global Markets Inc., J.P. Morgan Securities LLC
Underwriters: Barclays Capital Inc., BMO Capital Markets Corp, BofA Merrill Lynch, Credit Suisse Securities, Deutsche Bank Securities Inc., Goldman Sachs & Co, KKR Capital Markets LLC, LOYAL3 Securities Inc., Morgan Stanley & Co. LLC, RBC Capital Markets LLC, Sander O'Neill and Partners LP, Santander Securities Corp., Stephens Inc., UBS Investment Bank, Wells Fargo Securities LLC.

What Does SC Do? Lend Money to Poor People and Bad Credits

SC is a subprime consumer finance firm primarily involved in vehicle finance and unsecured consumer lending products. The firm employs proprietary software, which prices, manages, and monitors risk. SC has historically originated loans, through auto dealer franchises, as well as relationships with over 14,000 dealers across the United States; in 2013, SC entered a ten-year agreement with Chrysler to originate loans and leases under the Chrysler Capital brand. The firm's online platform,, is available to consumers through online vehicle dealers like,, and eBay Motors.

Banco Santander (NYSE:SAN) has extended the firm $4.5 billion in credit facilities with terms of three and five years. The firm also has substantial access to capital markets, having issued and sold $26 billion in securitized transactions since 2010 and obtained some $13.7 billion in committed credit lines and privately issued amortizing notes from commercial banks.

Valuation of SC

SC offers the following figures in its S-1 balance sheet for the nine months ending September 30, 2013:

Revenue: $2,998,651,000
Net Income: $581,744,000
Total Assets: $25,608,280,000
Total Liabilities: $23,039,122,000
Stockholders' Equity: $2,569,158,000


Auto finance is a competitive business, and SC must contend with numerous other firms that make similar subprime offerings. Competitors include Bar None, J.D. Byrider, Autobytel (NASDAQ:ABTL), and Southern Auto Finance Company.

Management and Excessive Compensation

Thomas G. Dundon served as President and CEO of SC from 2006 through November 2013, and currently serves as Chairman and CEO, having been appointed Chairman on December 28, 2013. Mr. Dundon's total compensation in 2012 according to page 104 of his S-1 was $85,219,660. Who says lending to poor people does not pay?

Dundon is also a Director of Santander Holdings USA. He holds a bachelor's degree in economics from Southern Methodist University. Mr. Dundon is joined by President and CFO Jason A. Kulas, who took over as President from Mr. Dundon and has served as the firm's CFO since January 2007. He previously served as Managing Director in investment banking for J.P.Morgan Securities Inc. and as an analyst for Dun & Bradstreet. He also held an adjunct professorship at Texas Christian University. Mr. Kulas holds a bachelor's degree in chemistry from Southern Methodist University and an MBA from Texas Christian University.

What Should IPO Buyers Consider

Though we're always leery of the 100% insider sale IPOs when sophisticated insiders are bailing out and when management compensation is outrageous, we still rate SC a Buy in the projected price range of $22 to $24. Investors are looking for financial companies to invest in and we expect the IPO to initially rise leading to a good short-term trade.

We are also hearing that the deal is several times oversubscribed and will probably price at the high end of the range of $22 to $24. Most financial IPOs in 2013 have also performed extremely well.

The firm's income has leaped from $174.1 million in calendar 2008 to $734.9 million in calendar 2012, and its well-established history of success and network of business sources should allow it to remain profitable. SC's relationship with Banco Santander is also encouraging, as the firm should rarely struggle with credit facilities.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SC, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.