Santander Consumer USA Holdings (SC) is now planned for pricing late Wednesday, January 22nd, after getting a very strong reception from institutional investors. The deal is being led by Citigroup and JP Morgan but is supported by a "cast of thousands" with 9 bulge bracket firms and 5 smaller firms on the cover. The deal size has been upped to 75M (from 65M) shares offered are all secondary (from Santander) so the company won't receive any proceeds from the deal. Total shares outstanding of about 350M imply a market capitalization of $8B. The price range has also increased from $22-$24 to $24-$25. We expect the deal to price at $25 and trade up a few points from there.
The management team has built a remarkable firm over nearly 20 years and now stands as a leader in the subprime lending space.
This deal will probably perform as well if not better than ING US (VOYA) which came public in early May 2013 with a pricing slightly below the range at $19.50 and has performed consistently well and has recently stabilized at the $35/share level. ING US is focused on insurance and investments around the retirement market and making high-ROE decisions in building a leadership position in that sizable niche. VOYA filed a $1.4B deal amount initially which is close to the $1.5B SC IPO in terms of size.
One oddity of the Santander Consumer deal is the full one hour roadshow presentation which is amazingly long. The CEO Tom Dundon is engaging but spends a long time talking about each slide and telling the story. Seems like nobody could persuade him to keep it short.
Santander has enjoyed 4% ROA and 30-40% ROAE for the past six years which is extremely good in financial services. Total assets in 2013 stood close to $27B with net income the past three years running at $700M/year.
Technology plays a role in the success of the company with very strong loan processing and approval capabilities. They have been winning business and providing "white label" services to companies like Chrysler. They have also figured out the right algorithms for the new world of subprime lending. 34% of US households are nonprime.
The "secret sauce" of the approval process brings together 2,000 bureau variables, 20 years of consumer behavioral data and proprietary algorithms to make 90,000 credit decisions from 200 business partners in a single day. The more they do, the better they get. It's very difficult to compete with this fully scaled technology at this point.
Growth in the core business will come from continued small increases in market share, a few new partnership sources and eventually direct to consumer via RoadLoans.com. Beyond autos the company is well-positioned in unsecured consumer lending in the form of personal loans (think LendingClub) and credit cards. (click to enlarge)
Structurally the sponsorship from Santander (which will own 61% post-IPO) provides substance, stability, funding and "opportunistic liquidity" measured in billions of dollars. Santander also helped bring global risk management, compliance and oversight into the business mix. They are a strong global player in consumer finance.
In total SC has drawn $23.6B of committed funding of over $47B. They have plenty of cash available to fund high return opportunities.
For some reason the company isn't providing full-year 2013 financials (only the 9 months through September 2013) but for that period net interest margin was $2.7B, up 26% YoY.
So the big question is where will this stock price and trade post deal. The original offering range was $22 to $24 with proposed annual dividends of $0.60/share for a mid-point yield of 2.6%.
Management is stating that they will "pay out 30+% of their net income in the form of dividends." Given that figure has been running at around $700M it suggests that the dividend is join to go up a material amount over time. For example for the year 2012 the company paid out $491M in dividends which is $1.40/share for a yield of 6%.
If investors do the math and believe in company execution that level of dividend pay-out would push the share price to $30+ and position it for 10-15% growth from there based on business results.