Synch Up With General Electric's Synchrony Financial IPO

Jul.28.14 | About: Synchrony Financial (SYF)

Summary

SYF, a consumer financial services firm spun off from GE, plans to raise $3.06 billion in its upcoming IPO.

We are optimistic on SYF as the firm is highly profitable and benefits from long-standing relationships with many of its partners.

The consumer credit industry in general should benefit from increased consumer spending as the American economy continues to recover.

Given strong management and extensive underwriting, we suggest investors get a piece of this IPO.

Synchrony Financial (Pending:SYF), a consumer financial services firm spun off from General Electric (NYSE:GE), plans to raise $3.06 billion in its upcoming IPO.

The Stamford, Connecticut-based firm will offer 125.0 million shares at an expected price range of $23-$26 per share. If the IPO can reach the midpoint of that range at $24.50 per share, SYF will command a market value of $20.3 billion.

Extensive Underwriting

SYF filed on March 13, 2014.

Lead Underwriters: Citigroup Global Markets Inc; Goldman, Sachs & Co; J.P. Morgan Securities LLC; Morgan Stanley & Co. LLC

Underwriters: Banca IMI SpA; Barclays Capital Inc; Blaylock Beal Van, LLC; BNP Paribas Securities Corp.; BofA Merrill Lynch; Castle Oak Securities, LP; Commerz Markets LLC; Credit Agricole Securities (NYSE:USA) Inc.; Credit Suisse Securities LLC; Deutsche Bank Securities Inc; Fifth Third Securities, Inc; Guggenheim Securities, LLC; HSBC Securities Inc.; ING Financial Markets LLC; Keefe, Bruyette & Woods, Inc; Lebenthal & Co., LLC; Loop Capital Markets, LLC; Mischler Financial Group, Inc; Mitsubishi UFJ Securities , Inc.; Mizuho Securities USA Inc; RBC Capital Markets, LLC; RBS Securities Inc; Samuel A. Ramirez & Company, Inc.; Santander Securities Corp; SG Americas Securities, LLC; SMBC Nikko Securities America, Inc; The Williams Capital Group, L.P

Summary: Retail Card, Payment Solutions, and Care Credit

SYF is among the largest consumer financial services firms in the U.S.; the firm financed some $93.9 billion in purchase volume in 2013. The firm offers a variety of credit products in partnership with retailers, manufacturers, industry associations and other partners, using these partners' websites, mobile apps, and approximately 329,000 locations in the U.S. and Canada to reach consumers. Significant partners include the likes of Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), Ethan Allen (NYSE:ETH), and Lowe's (NYSE:LOW).

SYF provides credit products through a trio of platforms, which it calls Retail Card, Payment Solutions, and Care Credit. By far the largest of these is the Retail Card Platform, which accounted for 69% of total platform revenue for the three months ended March 31, 2014. Retail Card offers private label credit cards as well as Dual Cards and small and medium-sized business credit products through 19 national and regional retailers. These retailers have a total of some 34,000 retail locations. SYF's private label cards are specifically for making purchases from a given partner, while its Dual Cards function as private label cards for purchases made from partners and as ordinary cards for other transactions.

The Payment Solutions Platform provides promotional financing for consumer purchases, primarily through private label cards and installment loans. The platform offers deferred interest, no interest, and reduced interest products through a total of 264 programs with approximately 62,000 partners, including retailers, manufacturers, buying groups, and others. Payment Solutions accounted for 15.1% of SYF's total platform revenue for the three months ended March 31, 2014.

The CareCredit platform offers promotional financing for elective healthcare procedures through 152,000 healthcare partners with some 177,000 locations. SYF offers customers a private label credit card that can be used at all CareCredit providers; the firm's partners usually compensate SYF for some of the cost of providing promotional financing to customers. CareCredit accounted for 15.9% of total platform revenue for the three months ended March 31, 2014.

SYF is the result of an effort on the part of GE to spin off its consumer financial services branch in order to reduce GE's risk profile; as of the completion of SYF's IPO, GE will continue to hold some 85% of SYF shares, though it intends to distribute these shares to GE shareholders in exchange for GE shares in the near future.

See our previous article for additional information.

Valuation

SYF offers the following figures in its S-1 balance sheet for the three months ended March 31, 2014:

Revenue: $3,091,000,000.00

Net Income: $558,000,000.00

Total Assets: $59,245,000,000.00

Total Liabilities: $53,203,000,000.00

Stockholders' Equity: $6,042,000,000.00

Competitors: Massive Financial Institutions

SYF competes with other providers of consumer credit products for both customers and partners.

Competitors for partners include massive financial institutions including Capital One (NYSE:COF), Chase, American Express (NYSE:AXP), Wells Fargo (NYSE:WFC), Alliance Data (NYSE:ADS), and many others. Some partners may also choose to develop their own sources of in-house financing. The firm's products also compete with the likes of Visa (NYSE:V) and MasterCard (NYSE:MA) as well as cash, checks, and debit cards as a form of payment.

Management

President and CEO Margaret M. Keane has served in her current positions since February 2014 and as President and CEO of GE's North American retail finance business since April 2011.

She previously served as President and CEO of the Retail Card platform of GE's North American retail finance business and as Senior Vice President of Operations of the Retail Card platform of GE's North American retail finance business.

Ms. Keane was named a GE Officer in 2005 and a GECC Officer in 1996.

Ms. Keane received a B.A. in Government and Politics and an M.B.A. from St. John's University.

Conclusion: Investors Should Synch Up With This IPO

We are optimistic on this IPO (and, subsequently, on parent GE).

SYF is highly profitable and benefits from long-standing relationships with many of its partners.

The consumer credit industry in general should benefit from increased consumer spending as the American economy continues to recover from the Great Recession and consumers become more comfortable with spending.

SYF's highly experienced leadership team is also an encouraging sign.

Though the firm certainly faces heavyweight competition from both traditional consumer credit sources and from emerging payment technologies like Google Wallet and Square, we believe that SYF merits serious investor consideration.

The extensive list of powerful underwriters could also give SYF a boost this week.

We are hearing there is good early demand for the deal.

We invite readers wishing to join the discussion on IPOs to click the +FOLLOW button above the title of this article -- and those looking for the latest developments to click +Get real-time alerts.

Note: As a large sample of information sources does not yet exist for SYF,we have taken much of the information for this article directly from SYF's S-1 filing.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SYF over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.