Seven years of private equity sponsorship and the sponsor's impending sale makes OneMain Holdings Inc. ripe for purchase, analysts said.
The Wall Street Journal reported that the company has been in advanced talks with interested parties in which it has been offering itself for acquisition.
OneMain is a giant in the vital niche of subprime installment lending, and its business and financial profile could attract a variety of foreign and domestic suitors, analysts said. The company owns what is by far the largest branch footprint in the sector with about 1,700 locations.
"If there is an institution that is looking to grow in the space, this is a pure play on that market," Compass Point analyst Michael Tarkan said.
Fortress Investment Group LLC has been a majority owner of OneMain and precursor Springleaf Holdings Inc. since 2010, putting OneMain's stint as a portfolio company at the far end of the ownership timeline that private equity sponsors prefer, observers said. Fortress Investment in February agreed to sell to SoftBank Group Corp., and analysts said the asset manager is possibly looking to monetize.
Compass Point analyst John Hecht highlighted OneMain's high returns on assets and a branch count that is more than triple that of its next-largest competitor.
"It serves a very fragmented market, and it is the biggest in (its) class," Hecht said in an interview.
Potential bank suitors could be Banco Santander and Banco Azteca SA Institución de Banca Múltiple, both of which have domestic specialty or subprime lending operations in the U.S., he said. Several private equity companies would be more likely buyers at the right price, Hecht said, adding that KKR & Co. LP and Lone Star Global Acquisitions Ltd. have bid for subprime lending properties recently.
Blackstone Group LP and Warburg Pincus LLC own branch-based lenders and could look to OneMain as a strategic buy, Janney analyst John Rowan said in an Oct. 9 research note to clients. Blackstone is a less likely buyer because portfolio company Lendmark Financial Services LLC bought branches from OneMain as part of the latter's merger settlement with federal regulators, Rowan said. He also believes potential suitors extend well beyond private equity.
"If you start to look at other potential acquirers that are banks, or online lenders, the list of possibilities gets much more broad," Rowan wrote.
As M&A conditions go, specialty finance is always a more active space than other industry sectors, Houlihan Lokey adviser Jeffrey Levine said in an interview. Sponsors who purchased specialty lending properties during the recession are now looking to sell just as the market is flush with capital, said Levine, a managing director and co-head of Houlihan Lokey's financial institutions group.
"They're going to be monetizing those investments in the next six, 12 to 18 months," Levine said.
Credit overall has improved, though there are areas of concern in subprime, and small businesses that borrow from specialty lenders are operating with better financial profiles since those investments were made, he said. Banks have always been sellers and buyers of specialty finance businesses, and the possibility of rising interest rates would strengthen their hands as acquirers, Levine said.
There will always be a demand for nonbank, nonprime credit, he said.
"How that market evolves with today's ever-increasing regulatory scrutiny will determine who will be winners and losers in that market," Levine said.