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Hot Leasing M&A Market Getting Hotter

August 05, 2014, 07:00 AM

After the decline in activity that occurred during the financial crisis and great recession, the M&A market for equipment leasing and finance businesses is definitely showing signs of heating up in 2014. Two large transactions – Element Financial’s acquisition of PHH Arval and CIT’s acquisition of Direct Capital - were completed in the past month.  However these two high profile deals may be just the tip of the iceberg. We are aware of two other planned acquisitions where letters of intent have been signed with completion expected soon, and there are several other equipment leasing companies that are being actively marketed for sale.

Not only can we expect a number of additional leasing company sales to be announced in the coming months, but conditions appear favorable for this trend to continue. M&A activity is heavily influenced by economic factors and business confidence levels. Positive factors for equipment leasing M&A include substantial liquidity in the banking system, historically low interest rates, record stock market prices, improving price/earnings multiples of publicly owned buyers, capital that needs to be deployed by private equity firms, and an improving economy with expectations of growth in business capital investment.

Part of the current flurry of M&A interest can be attributed to pent-up demand on the part of both buyers and sellers. Many potential buyers were not interested in acquisitions until business conditions improved in the economy as a whole and for the equipment leasing industry. Furthermore banks, that are the most active acquirers, have had weak loan demand, and the acquisition of a leasing business can provide much higher returns than many alternative investments.

During the recession, companies interested in selling delayed their sale plans until their financial results improved, the demand for leasing company acquisitions increased, and acquisition pricing improved. In discussions with a number of independent leasing company owners, we find a prevailing belief that now may be the best time to sell in this decade. Not only are their companies doing well, but buyers are offering some of the highest premiums that have been paid for equipment leasing and finance companies in many years.

Bank-owned leasing businesses have an obvious advantage over independent leasing companies with their lower cost of funds and higher leverage ratios. Thus many independent leasing companies have a long-term goal of being acquired by a bank. Never have we seen such wide-spread interest in leasing company acquisitions from the banking community. This interest is not just from the major banks with a well-established presence in leasing; many small and mid-sized banks with little or no leasing activity are now seriously considering a leasing company acquisition as a good strategic move.

Banks have traditionally been most interested in the middle- and large-ticket leasing markets with most of them originating the majority of their business directly from lessees. We are now seeing a greater interest in the small-ticket leasing market from banks. For example, Umpqua Bank has been happy with their 2013 acquisition of Financial Pacific Leasing, a small-ticket lessor with an indirect origination model, and a number of banks have been looking at small-ticket vendor leasing acquisition opportunities in 2014.

Banks have not been the only category of business to step up their equipment leasing acquisition activities. Several independent leasing companies, including Element Financial, have been pursuing acquisitions in order to expand and diversify their businesses and to utilize funding arrangements that are more favorable than those available to many independent leasing companies. Although private equity firms are generally at a disadvantage with regard to funding costs, a number of them have been pursuing equipment leasing companies in specialized markets. Private equity firms may also offer terms that can be more attractive to independent leasing company entrepreneurs, including retention of a minority interest in the business and/or potentially lucrative earn-out arrangements.

When asked by management owners of independent leasing companies whether now is a good time to consider a sale, I respond that now is a great time to be a seller if the business is in an attractive market segment and has experienced growth in earnings and lease originations with above-average returns on equity and assets. However, the sale of a business is also a very personal decision that could hinge on a variety of personal objectives. If the goal of the owner(s) is to retire in a few years, certainly now would be a good time to consider selling the business because a leasing company is generally more valuable if the owner/managers agree to remain with the business for three to five years. However, if they have a much longer time horizon and prefer to run their own business without having to report to a parent company boss, then they may want to remain independent for a while longer. Of course, business needs must be considered also. If their business is suffering because their cost of funds is higher than the competition or if additional capital is needed to take advantage of growth opportunities, now may be a good time to consider a sale to a strong buyer.

In summary, a variety of factors have influenced the current expanded leasing business M&A activity. Most individually-owned leasing companies will eventually be sold, and timing is favorable for attractive leasing companies to consider selling at this time. A number of independent leasing companies have already made that decision, not wanting to be left behind after the more aggressive acquirers have satisfied their acquisition objectives. Buyers of leasing companies should realize that it is a very competitive market and that the most attractive companies are commanding hefty valuations. However, with interest rates very low, substantial liquidity in the banking system, and a limited number of alternative investment opportunities available to banks, we foresee a continuation of this trend of a hot M&A market into 2015.

Bruce Kropschot
Senior Managing Director | The Alta Group
Bruce Kropschot is senior managing director of The Alta Group and heads the global consultancy’s merger and acquisition advisory practice in North America. Alta executives have arranged the sale of more than 200 equipment leasing and finance companies in the United States and several other countries. In addition to representing buyers and sellers of leasing companies, Alta’s M&A advisors arrange the sale of lease portfolios, assist leasing companies in obtaining debt and equity capital, perform business valuations, and provide acquisition due diligence support. Kropschot, active in the equipment leasing industry since 1972, served as a senior executive with three large leasing companies and has been providing M&A advisory services for 28 years.
Comments From Our Members

Dexter VanDango • View APN Profile
Excellent article Bruce. I could not have said it better myself. I believe that right now is a perfect time for independents to be considering a sale. Banks are the most obvious buyers. Although, I believe that other financial institutions like insurance companies and private equity firms are likely buyers of some of these independent companies.
8.6.2014 @ 10:31 PM
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