Canadian commercial financing company ECN Capital Corp. is moving into the U.S. home-improvement financing market, with a $410-million acquisition deal announced on Thursday.
The Toronto-based company, which focuses on aviation, rail and Canadian commercial and vendor financing, is set to acquire Service Finance Holdings LLC by the third quarter. The Florida-based Service Finance starts and manages retail instalment contracts (a type of loan directly between a vendor and customer) for home improvements in the U.S.
“We are acquiring a high-quality business with strong growth potential and low capital requirement, as there is strong investor interest in the assets at Service Finance,” said Steven Hudson, CEO of ECN Capital. Mr. Hudson said the acquisition fits ECN Capital’s business model, which is to take a fee for managing portfolios of leases and other credit products on behalf of banks, insurers and other institutional investors.
Mr. Hudson met the president of Service Finance, Mark Berch, two years ago and worked on the acquisition for more than a year. His company was attracted to the opportunity because it sees considerable growth potential in financing home-improvement purchases such as windows, air conditioning and heating systems and solar power, Mr. Hudson said.
According to data provided by ECN Capital, the U.S. home-improvement market is estimated to be in excess of $350-billion. And the market for retail instalment financing is growing.
The number of people funding their home improvements with cash declined by five per cent between 2012 and 2015, while the number using financing increased by 10 per cent. Retail instalment contracts make up approximately 12 to 14 per cent of the financing market, a share that ECN Capital expects to grow to around 20 per cent over the next five years.
In line with this increase, Service Finance has been growing the value of the instalment contracts it starts from $500-million in 2015 to $700-million last year. The company expects to break $1-billion in 2017, and $1.5-billion in 2018.
Service Finance has strong relationships with window-maker Pella Corp. and heating and cooling company Lennox International Inc, Mr. Hudson said. And according to materials prepared by ECN Capital, the “new vendor pipeline is robust with several national and regional relationships in the works.”
ECN Capital says the acquisition will increase adjusted earnings per share immediately. According to company projections, adjusted earnings per share will rise from $0.17 to $0.21 in 2017, and increase to $0.32 by 2018 and $0.38 by 2019.
“This is a great pickup,” said Jaeme Gloyn, equities analyst with National Bank Financial.
“Low-capital business, improving ROE business, zero credit risk – it looks like a pretty solid transaction. It’s just up to the company now to execute and deliver on their origination and managed asset growth,” Mr. Gloyn said.
“From a financial perspective, perhaps a little bit on the expensive side, if you look at trailing 12-month earnings,” he added. “But given the projections they are forecasting, you’re paying for growth, which is quite substantial in this business.”
Mr. Gloyn added that ECN Capital is making good on a transition away from the rail finance and Canadian commercial and vendor finance aspects of their business, a move that has been hinted at for months.
“The company is pretty confident they’re going to sell one of them by the end of the year, and that will provide them with the capital to deploy into potentially more home improvement type assets,” Mr. Gloyn said.
He added that the home-improvement market is “certainly more attractive from an ROE perspective. The margins in both of those businesses – rail and Canadian C&V – have been getting compressed lately as banks and other institutional investors reach for yields.”
The company already exited the U.S. commercial and vendor finance market, selling its business to PNC Financial Services Group in February for about $1.25-billion.
Service Finance’s founders will remain with the business for at least five years after the acquisition.
Source: https://www.theglobeandmail.com/report-on-business/ecn-capital-to-buy-service-finance-for-410-million/article35247286/
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