A SUBPRIME RENAISSANCE: CITIGROUP SELLS ONEMAIN TO SPRINGLEAF

Springleaf Holdings Inc. set to buy Citigroup Inc’s OneMain Financial Holdings for $4.25bn in cash, forming the largest subprime lender in the United States. Citigroup’s strategy to sell its non-core operations and focus on wealthier clients produces the combined entity with $15bn dollars in assets, 2000 branches, and a capacity to serve the growing subprime markets.

OneMain, part of Citi Holdings, provides customer-finance services such as loans to meet unexpected expenses and buy home appliances and has recently turned profitable following the financial crisis. Springleaf is one of the main competitors of OneMain, and it is owned since 2010

by Fortress Investment Group LLC.

springleaf to buy citigroup's onemain

Companies Overview

OneMain Financial is the heir of Commercial Credit, a company that began in 1912 lending money to help people buy the first automobiles produced. The company grew parallel with the American economy, and later expanded into credit insurance. When Sanford Weill became CEO in 1986, he led the company into the series of mergers and acquisitions that originated Citigroup, the biggest financial conglomerate at the time. Commercial Credit, renamed CitiFinancial, played an important role in Subprime lending before the 2007-2009 financial crisis, originating $26.3bn non-prime loans, in the three years leading up to the crisis. Due to the enormous losses realized by CitiFinancial, and the bailout of the parent company by the U.S. Government, Citigroup moved this and other entities branded as “non-core operations” into Citi Holdings in 2009, planning to dispose them of as soon as the market recovered, dismantling the “financial supermarket” built by Sanford Weill. In December 2010 CitiFinancial was rebranded OneMain to sever its ties with the parent company and ease its future disposal.

Springleaf is another big player in the installment loan market in the U.S.; the company traces its origins to Evansville, Indiana – based American General Financial (formerly controlled by AIG) involved as OneMain in massive subprime origination before the financial crisis ($21.8bn non-prime origination between 2005 and 2007). In 2010, Fortress Investment Group (an alternative investments firm) bought an 80% stake in AGF for $125mn and then changed the name to Springleaf, to give it an air of optimism and rebirth (and probably to conceal its inglorious past). In 2013, when the company went public after turning profitable for the first time after the financial meltdown, it was valued at almost $1.9bn. With the acquisition of OneMain, the combined entity will be the strongest player in the resurging U.S. subprime lending market.

Rumors leaked since mid-2014 that Citigroup was hastening to sell OneMain, the biggest disposable asset remaining from the non-core businesses set apart in 2009. OneMain filed for listing on NYSE in October 2014 with an estimated valuation around $4bn, but it was clear that Citigroup would have preferred an outright sale instead (Springleaf was considered the most likely buyer), and was just pursuing a dual-track strategy in order to squeeze more value out of OneMain.

Many analysts anticipated Citigroup obtaining a higher price for OneMain, as much as $5bn. However the sale (along with the retirement of funding from Citi Holdings) permits Citi to add $1bn to its earnings before taxes, while reducing the complexity of the gargantuan financial conglomerate, which often proved difficult to manage.

Transaction Drivers

Through the purchase of Baltimore-based OneMain, Springleaf will undergo a “transformational change” – as described by the chief executive Jay Levine – becoming the largest subprime lender and the dominant consumer-finance operator in the U.S.

OneMain and Springleaf were already the only sizeable national participants in the industry, but with more than $15bn in assets, roughly 2.5 million customers and almost 2000 branches in 43 states, the new company will serve a larger and increasing share of the American non-prime customers.

Springleaf’s management believes this move will lead to mutual success, due to new growth potential of the combined company. The deal gives Springleaf access to OneMain’s widespread presence among low-income borrowers, based on a higher number of branches than Citibank itself.

Among the other drivers of the transaction, the strategy of Citigroup to sell unwanted and non-core assets played a large role as well. In recent years, Citigroup has divested the well-known Smith Barney brokerage unit and life insurer Primerica, selling more than 60 businesses and $700bn of assets, to ease business management post-crisis. In 2014, Citigroup reduced Citi Holdings’ assets to 5% of total group assets, down from a peak of 30%.

OneMain represented the largest activity remaining in Citi Holdings. Potential deals to sell this unit fell through previously, as Citigroup did not want to sell for a low price, further exacerbating investors growing concerns about the ability to raise funding for the deal.

Citigroup is now expected to use part of the proceeds to retire certain funding that supports Citi Holdings. The combination of the debt retirement and the remaining proceeds is expected to increase about $1bn to Citigroup’s earnings before income taxes. With this simplification strategy carried out by Citigroup’s CEO Michael Corbat, the company has more capacity to focus on wealthier clients, to whom it can offer more products using less capital.

Finally, many analysts believe that Citigroup is seeking approval from the Federal Reserve later this month to increase its dividend, as part of the central bank’s annual tests of big banks’ health. Last year, Citigroup was the largest U.S. bank to fail the critical stress test on its capital management, putting its dividend plans on hold. Citigroup failed what the Fed calls a “qualitative basis”, as regulators found lacking the bank’s ability to project revenue and losses across its global footprint.

Most analysts find Citigroup and Mr. Corbat, whose job seems now to be at stake, have taken the necessary steps to continue dismantling Citigroup’s non-core activities, picking up where predecessor, Mr. Pandit, left off after Citigroup took the largest U.S. bank bailout. Thus, OneMain’s sale shall be seen as Citigroup’s try to boost its’ capital ratios and dividend more quickly. However, although the bank has billions of dollars in excess capital, this year success for Citigroup is not certain yet: due to having retail branches in more than 25 countries, the firm’s sprawling global footprint is with no doubts difficult to monitor. Another consecutive fail on qualitative issues would appear as a Fed’s direct condemnation of Citigroup’s business model and management.

Structure and terms of the deal

Springleaf Holdings confirmed it would buy Citigroup’s OneMain Financial Holdings for $4.25bn in cash. Although the transaction had been rumored as being “close” in late February, some analysts expected a higher price (Jefferies reported it had expected OneMain to fetch $5bn).

The deal will create a lender with more than $15bn in assets and 2,000 branches, able to serve the growing population of U.S. sub-prime consumers. Springleaf said it expects to consolidate at least 200 branches starting from mid-2016 and the company CEO Jay Levine declared that the combined entity is expected to earn up to $900mn by 2017.

Fortress Investment Group, the major shareholder of Springleaf, saw a rise in share price of 2.7% after the announcement of the deal. Springleaf shares soared to $52.44 on Tuesday, a record for the company, representing an increase of 38%. Citigroup shares rose slightly to $53.73.

The deal, subject to regulatory approval, is expected close in the third quarter of the year.

Springleaf’s financial advisers are Bank of America Merrill Lynch, Barclays, Credit Suisse and Goldman Sachs; Skadden Arps Slate Meagher & Flom LLP is the legal counsel. OneMain’s financial and legal advisors are Citigroup itself and Davis Polk & Wardwell, respectively.


To contact the authors:

Adele Bertolino                    adele.bertolino@studbocconi.it

Alessandro Caiumi              alessandro.caiumi@studbocconi.it

Giulio Giacomo Coperti        giulio.coperti@studbocconi.it

Steven Suskauer                steven.suskauer@studbocconi.it

To contact the editor responsible for this article:

Steven Suskauer                steven.suskauer@studbocconi.it