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1 year after IPO, GreenSky could seek sale at stock's all-time low

After just over a year on the public markets, one of the country's biggest digital lenders is looking to sell.

GreenSky Inc. went public in May 2018 at $23 per share. After the stock lost more than a third of its value Aug. 6 on the heels of suspended guidance and a strategic review announcement, it has fallen more than 70% from its IPO price. The digital lender's second-quarter results also missed estimates in most major categories.

The company's shares now trade at an all-time low. Other digital lenders have fared better over the past year, but GreenSky's peers have also lagged far behind the broader market.

The GreenSky stock selloff is more a reaction to the weak second-quarter results than other news, said Sandler O'Neill analyst Christopher Donat. The company reported earnings per share five cents lower than estimated in addition to a sizable adjusted EBITDA miss, lower revenue and lower transaction volume growth compared with analysts' consensus expectations.

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But uncertainty around the stock was heightened even further by the board's pending strategic review of alternatives, a process that often includes seeking out potential buyers for a company.

In an interview, Donat pointed to three possible strategic buyers: American Express Co., which has an existing partnership with GreenSky; Goldman Sachs Group Inc., and in particular its Marcus division; or Square Inc., which has a strong mobile merchant-acquiring business.

A buyer would have to be comfortable sustaining or replacing the funding relationships that GreenSky now has, as well as taking on the risks inherent in the consumer spending categories GreenSky's loans focus on, Donat said. Much of its lending goes toward financing home improvement and healthcare costs. Home improvement or repair spending often dries up quickly during an economic downturn.

A deal could also come from a strategic buyer or a private equity firm, although a deal to go private would involve working through GreenSky's dual-class share model.

The analyst downgraded GreenSky to "hold" from "buy," pending clarity on future funding relationships and the strategic review.

GreenSky has a complex business model that has at times confused investors, analysts said.

The online lender connects banks with consumers looking to finance large purchases at checkout through an efficient digital application process. GreenSky charges merchants a transaction fee every time a loan is made through the platform. It also charges the lenders an ongoing servicing fee, which is a fixed percentage of the outstanding loan balance.

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But it also absorbs part of its bank partners' credit risk in what the company has called a waterfall funding model. Even though it still expects its main revenue driver — transaction volume — to grow 20% year over year for 2019, earnings have been more volatile in recent quarters.

GreenSky also relies on just nine banks to fund its loans.

Four of those partners — SunTrust Banks Inc., Regions Financial Corp., Synovus Financial Corp. and Fifth Third Bancorp — funded most of the loans on GreenSky's platform, the company said in August 2018. But Regions said in May that it would not renew its indirect funding commitment when it expires at the end of 2019.

The nine partners have committed a maximum amount of $11.9 billion in loans, although GreenSky has not disclosed how much funding each bank in particular contributes. Its other partners are Midland States Bancorp Inc., Ion Bank, Renasant Corp., Flagstar Bank FSB and BMO Harris Bank NA.

In a nod to those concentration concerns, GreenSky unveiled a plan to seek funding from insurance companies, institutional asset managers, or government-sponsored pension plans in addition to its existing bank partners. The new model would result in less earnings volatility, executives said on an Aug. 6 earnings call.

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BTIG analyst Mark Palmer said the strategic review is an acknowledgment that GreenSky's current model is "not well suited" for the public markets.

"In particular, the complexity around the waterfall model that the company has with its bank partners is something that has been very confusing to many investors," Palmer said in an interview.

"Some investors have lost patience with the model," Sandler O'Neill's Donat said.

Bringing in new funding partners outside of banking could benefit the stock, but competition in the point-of-sale lending space has been heating up.

These dynamics make GreenSky difficult to model, analysts say. Although it is exposed to liquidity constraints, GreenSky also "boasts impressive origination tech" and reaches customers that its bank partners otherwise would not hit, said SunTrust analyst Andrew Jeffrey, in a note following the earnings release. But the analyst said GreenSky is not likely to find an acquirer at a material premium to the current market value.

It is feasible that GreenSky will attract a buyer given its expansive network of merchants, which Palmer sees as the main asset GreenSky could provide to another company.

"Whether GreenSky would command a significant premium over its current trading price is another question," Palmer said. "While that [merchant] distribution is valuable, it's not necessarily worth significantly more than where the stock is currently trading."