The Wall Street Journal published an article on February 20th detailing that subprime lending group, Springleaf, is currently in “exclusive” talks with Citigroup to potentially purchase their subprime lending unit, OneMain Financial.  While there is no official deal yet, it was reported that Springleaf has agreed to pay more than $4 billion for the company.  Springleaf shares rallied 13.62% last Friday, February 20th after news broke.  Citigroup is likely interested in a deal with Springleaf, due to the fact that the bank had already put into motion a spinoff IPO of OneMain and has said that it would be open to a sale.

subprime lending
Forbes.com

 

Doubling Springleaf’s earnings power

Analysts at BMO Capital Markets believe that if the deal goes through, it could prove to be a huge “transformational deal” for Springleaf.  Springleaf would see its assets double, as well as its earnings power.  Due to increased regulation and limits for banks on subprime loans, banks are increasingly exiting the subprime unsecured consumer loan market, which puts financial services companies, non-banks, such as Springleaf in a much more stable position to continue taking up market share in the industry.  Based on BMO’s calculations, Springleaf could see earnings per share results come in 30% higher than they had estimates, if the deal goes through.

Springleaf

Reconsidering Springleaf rating and target

Currently, BMO Capital Markets rates Springleaf a “market perform” with a price target of $38.00.  Shares of Springleaf currently trade at $38.24, which shows no upside according to their analysts.  However, the research company said that if the deal comes together and Springleaf comes away with OneMain, they would reconsider the stock rating and price target, implying that an upgrade would be in order.  This would add more confidence for the subprime lender and not to mention a good pop on the news, no doubt.

The bottom line here is that OneMain offers Citigroup limited benefit and the bank already has filed IPO paperwork for OneMain in October 2014.  Essentially, Citigroup is trying to unload the business.  Springleaf would benefit greatly from acquiring its rival, due to the fact that the business would essentially double and would have a much bigger share of the market.  Analysts are firmly behind the deal and already are saying that Springleaf could be earnings double if the two sides are able to work out the specifics of the deal.  Overall, it seems as though the deal will likely happen.  Citigroup wants to get rid of the business and Springleaf is willing to pay $4 billion, it is hard to imagine that Citi would not find that enticing.

Disclosure: None