DFC Global, the corporate parent of Money Mart and other payday lending brands, has announced that it will be sold to Lone Star Funds for $1.3 billion. That number corresponds to an offer of $9.50 per share. In reality, though, the price is really $367 million, as Lone Star is also going to assume approximately $1 billion of DFC's debt.
DFC Global offers payday loans, pawn loans, check cashing, gold buying, money transfer, and reloadable prepaid
cards. DFC Global's CEO says his company looks for ALICEs: "Asset Limited, Income Constrained, Employed"
The firm has approximately 1,500 retail locations. A fair share are in the United States, but the company also has a sizable footprint throughout Europe. Almost forty percent are located in the UK and Ireland under the name Money Shop. In addition, the company offers has built out an online payday loan program under the names PaydayUK and Payday Express. One-third are in Canada, under the name Money Mart.
That footprint essentially means that it is a mistake to look at DFC Global as a domestic company. In fact, you could argue that they are essentially a European company with a minor footprint in a few states in the US.
Nine dollars and fifty cents per share is a premium of about 6 percent over the closing price last night. But it is almost twenty-five percent below the currently recorded book value of the company. How could that be? True, payday loans are notorious for having heavy loss rates. That's certainly the case with DFC, where 30.5 percent of all unsecured consumer loans were in default at the end of June 2013. As of last year, DFC was betting that $40 million of its loans are going to go bad. But those expectations are baked in to a book value of its loan portfolio.
The likely culprits for that discount are in Europe.
The first reason is that the United Kingdom is doing its best to put its foot down on payday lending. The UK's relevant financial regulator recently decided to crack down on the practice of "continuous payment authorization." CPA is a mechanism that allows a lender to watch a consumer's account for deposits in real time. As soon as a deposit hits, the lender can put in an ACH to collect on a debt obligation. Going forward, consumers have the ability to tell their bank to stop facilitating these transactions. It applies not just to payday loans but to a whole assortment of sectors: magazine subscriptions, gym memberships, travel insurance.
The second is in Poland, where regulators are thinking seriously about eliminating payday lending altogether. DFC offers payday and longer-term unsecured loans in Poland. In Poland, their longer-term installment loans have a size consistent with a payday loan (less than $500) but are offered for terms of almost one year. In the US, it is a different story: the typical loan is for fourteen days.
The next question is "Who is Lone Star?"
Lone Star's web site says that it looks for investments when "liquidity is restricted and financing is constrained" and where "balance sheets are under pressure and there is a need to dispose of high volumes of assets to manage capital, deleverage and build liquidity." To me, though, the interesting thing about Lone Star is its genesis. Its founders built the company on profits that it made from buying up the ashes of the S & L crisis.