Citi's OneMain unit is apparently up for sale.
The unit competes directly with Springleaf in the high-risk, high-reward personal loan space.
How much is OneMain worth to Citi?
By now, the news that Citigroup (NYSE:C) wants to rid itself of its legacy personal loan business, OneMain, is well known. This is a business that doesn't fit into Citi's long-term goals, management contends, and thus, must be disposed of in one way or another. The fact that the decision has been made is good for shareholders, as it means that potential ambiguity regarding OneMain's future has been assuaged. Citi will find a buyer for OneMain, be it a hedge fund, a strategic buyer or the public via an IPO. The only question is how much OneMain is worth and what Citi could potentially get for it; that is the subject of this article.
Citi doesn't do us the favor of breaking out OneMain in its financials, so valuing it is a bit of a difficult proposition. However, we do have some clues we can go on in order to assign a potential value to the business. Management has stated publicly that OneMain has $10 billion in assets and is profitable. Unfortunately, that is the extent to which management will go to describe this business to us. However, that should actually be enough to go on because of one thing; OneMain has publicly traded competitors.
For the purpose of this analysis, we'll use Springleaf (NYSE:LEAF), the personal loan business formerly known as American General Finance. Springleaf does essentially the same thing as OneMain, providing high-risk, high-reward loans to those in need of such financing. Thus, we can use Springleaf's results to determine what Citi's OneMain may be worth. What's more, Springleaf just recently went public, providing further evidence of what OneMain could go for.
Springleaf's 10-K shows Springleaf's total assets at $12.7 billion, or slightly larger than Citi's OneMain, so it is a terrific gauge of the latter's prospects. Springleaf produced a net operating loss of $136 million for 2013, and while we don't know OneMain's operating income, CFO Gerspach said it was profitable, so we can reasonably assume it's more than zero.
Given that Springleaf isn't profitable, we can't value it on earnings. We can, however, value it using other traditional valuation techniques that we can then apply to OneMain. The one I'd like to apply first is the price the market is willing to pay for the company's asset base. Springleaf has $12.7 billion in assets, and if we assume OneMain is $10 billion, we can reasonably assign a value as such. Springleaf is currently valued at $2.8 billion, as its shares are trading in the $24 range as of this writing. This means Springleaf's asset base is being valued at about 22 cents on the dollar. This makes a lot of sense, as Springleaf is nearly completely capitalized with debt financing. In other words, Springleaf doesn't own most of those assets.
Unfortunately (I keep saying that word), we don't know how much of OneMain is equity- or debt-financed. However, the fact that OneMain is profitable suggests to me that leverage is likely lower than at Springleaf, because Springleaf's largest single expenditure is interest expense. If OneMain is profitable, I'd bet it has a lot to do with how it's financed. This means potential investors would be getting more in book value in relation to the asset base than they do with Springleaf, a fact that investors will pay a premium for.
Now, OneMain could potentially get some multiple of its earnings - we won't know until the sale happens - but most likely, it will be valued like Springleaf. Given the likelihood that OneMain is more heavily financed with equity than Springleaf and that it is profitable, we could see the value of OneMain's assets go for something like 30 cents on the dollar or more. This would put the value of OneMain at something north of $3 billion. A lot will depend on the details that are as yet undiscovered, but I think a very reasonable sales price for a business that is smaller but more profitable than Springleaf is between $3 and $4 billion, if Springleaf is worth nearly $3 billion while losing money. This would go a long way towards helping Citi actually have a capital plan approved by the Fed (imagine that). In the end, the OneMain sale is something I'm certainly in favor of, as even if my estimates are wrong, Citi will net billions of dollars from the sale and put it to better use, while reducing risk to shareholders.
Disclosure: I am long C. 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.