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Santander Consumer's perseverance rewarded with minority stake buy-in

Santander Consumer USA Holdings Inc.'s stint as a public company will end nearly eight years after it began as the nonbank auto finance company agreed to terms allowing majority owner Banco Santander SA to acquire its remaining public float.

The all-cash tender offer slated to close in the fourth quarter of $41.50 per share, or $2.51 billion in the aggregate, marks what Santander Consumer CEO Mahesh Aditya described in a communication to employees as "a testament to the strength of SC, and our outstanding performance over the years — even in the face of some very challenging circumstances."

Specific terms and conditions of the tender offer, including a March 31, 2022, termination date, were disclosed in an 8-K filed Aug. 26.

From a stock that began to languish below its initial offering price not long after its equity market debut in January 2014 to recurring regulatory scrutiny of various aspects of its business and the unprecedented disruption created by the onset of COVID-19, Santander Consumer arguably confronted more than its share of headwinds. It is going private at a time when its fortunes have decidedly been on the upswing.

That has been recently underscored by what Aditya characterized during a conference call as "record-setting" results from the standpoint of both loan originations and profitability in the second quarter and Santander Holdings USA Inc.'s decision to increase its offer price by 6.4% from the terms outlined in a July nonbinding proposal. More broadly, soaring used-vehicle prices, historically attractive funding costs in the asset-backed securities market and multiple rounds of federal government stimulus have boosted auto and nonprime lenders, in particular, in ways that likely would have seemed inconceivable amid the financial market dislocation of March 2020.

The $41.50-per-share price represents a premium of 14.6% to the volume-weighted average price of Santander Consumer's shares during June, before Santander Holdings USA's initial proposal was made public. The premium to the stock's historical valuation is considerably more significant.

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Santander Consumer's shares closed at a discount to their $24.00 IPO price on nearly seven of every eight trading days in their first seven years of listing, a stretch that ended Jan. 22. As recently as Feb. 2, the stock closed below that threshold. During the worst of the March 2020 sell-off in the broader markets, Santander Consumer's stock changed hands for as little as $9.74.

Conditions in the auto finance market are certain to normalize, particularly as it pertains to used car prices as supply chain challenges that have constrained production by original equipment manufacturers dissipate. But as one of Santander Consumer's subprime auto finance competitors explained during an Aug. 12 call, some structural features and current market dynamics mean the good times could last.

"There are very few new entrants in the industry," said Charles Bradley, chairman, president and CEO of Consumer Portfolio Services Inc. "Five years or so ago, there was a whole bunch, and most of them didn't make it. But there really hasn't been a lot of new folks coming in. There's a few people coming in from ... the fintech play, but not really just straight originators."

As it pertains specifically to Consumer Portfolio Services, Bradley said: "We literally are firing on all cylinders across the board, from marketing originations to collections, just about everything we can think of. It's all going about as well as we possibly can get it to go."

Banco Santander, for its part, sees multiple benefits to wholly owning Santander Consumer. It projected that the deal would be accretive to EPS by approximately 3% in 2022. CEO José Antonio Álvarez in discussing the nonbinding proposal during a July call said the transaction would allow the bank to pursue opportunities to become more efficient with a range of U.S. businesses headlined by Santander Bank NA.

The CEO said the Boston-based institution had succeeded in substantially repricing its deposit base, which exceeded $78 billion as of June 30. But, Álvarez added, Santander has not been "taking advantage of this deposit base to fund the consumer business" to the fullest extent.

Under an agreement between Santander Consumer and Santander Bank, the former entity facilitated the purchase of $4.5 billion in retail installment contracts on the latter's behalf during the first half of 2021, up from $2.8 billion during a markedly different environment in the year-earlier period. Santander Consumer originated $14.87 billion in retail installment contracts for investment and sale to other parties during the first half of 2021.

Santander acquired a 90% stake in the predecessor to Santander Consumer in a $771 million December 2006 transaction. Its precise stake in the company has ebbed and flowed over time, increasing to its current level through a share buyback program during 2020.