I found it curious to wake up this morning to news that Mexico's Grupo Elektra (OTC:GLEKY), a Mexican retail and financial services conglomerate, was acquiring American payday lender Advance America (AEA) for $780 million in cash. While it represents virtually no threat at all to First Cash Financial (FCFS), it's an interesting twist on the two companies' growth strategies.
A Familiar Story, Told Backwards
First Cash built a solid pawn shop business in the U.S. by catering to consumers who largely operated outside the traditional banking and credit channels (whether by choice or otherwise). The company then found a new leg to its growth by expanding its pawn shop operations to Mexico - a country that is remarkably more "under-banked" than the U.S. Through a combination of torrid new store building and solid same-store sales growth, Mexico has grown to over half of the company's business and more than half of its growth.
By comparison, Grupo Elektra has built itself in part on offering a range of banking and financial services to generally under-banked Mexican consumers. Most of Elektra's Banco Azteca locations are co-located in its Elektra and Salinas y Rocha electronics stores, and many of them offer lending products that are broadly similar to payday loans. There's relatively little regulation of consumer lending in Mexico and Banco Azteca, through fees, charges, and interest rates, frequently charges APRs approaching 100%.
Now Elektra is buying the largest American payday lender in Advance America and paying about 9x 2012 estimated earnings to do so. Certainly the American payday lending market opportunity is huge, but it's a big bite for Elektra to take.
From Frying Pan To Fire?
In some respects, this is a curious move for Elektra. Regulation of consumer banking is pretty light in Elektra's Latin American markets (which include Mexico, Panama, and Brazil), but the U.S. payday lending industry is a frequent target of greater regulation and restriction - so much so, in fact, that First Cash has long since de-prioritized it in favor of pawn lending.
That said, the competition spectrum will be different. Elektra competes with the likes of Citigroup (C), HSBC (HBC), and Banco Santander (STD) in Mexico, and not only do all of these companies have the same ability to charge high fees and rates in their Mexican lending operations, but they are all also part of multinational financial institutions that can invest more assets into branch expansion and information systems.
Still, it will be interesting to see if competition in the U.S. is any more hospitable. World Acceptance (WRLD) and DFC Global (DLLR) may be smaller than Grupo Elektra, but it's not as though they're bit players in the U.S. small loan and payday lending markets, respectively. Remember, too, that banks like Wells Fargo (WFC) and Regions Financial (RF) are expanding their deposit lending businesses - a service that may recapture some customers who would otherwise turn to payday lending in tough circumstances.
Little Real Impact To First Cash
The good news for FCFS shareholders is that this transaction means next-to-nothing for First Cash Financial. Elektra's majority owner already operates a small chain of pawn shops and First Cash's U.S. payday operations are largely limited to Texas (and getting smaller year by year as a percentage of sales). If nothing else, perhaps this is a slight positive insofar as Advance America may distract Elektra management and/or command more capital - slowing the growth of Banco Azteca.
The Bottom Line
Some Advance America shareholders are likely a little frustrated with a takeout price that offers them only about 6.5x trailing EBITDA. That is particularly relevant as it looks as though growth might re-accelerate in 2012 and upcoming elections could deliver federal and state governments less inclined to be hawkish about consumer protection or consumer finance reformation.
Even still, this is the best price the stock has seen since mid-2007 and long-term shareholders have seen the company's operating environment become increasingly less-friendly and less-profitable. Said differently, Grupo Elektra's price may not be entirely fair given the returns of this business, but a "fair price" likely wasn't going to come about either way.