Associates First Capital Corp. is acquiring subprime auto lender Arcadia Financial Ltd. in a $200 million deal that is expected to be consummated by the end of March.
Associates, through its TranSouth Financial Corp. auto lending subsidiary in Fort Worth, Texas, and Minneapolis-based Arcadia serve similar customers at the less risky end of the subprime segment. But they approach the market in distinctly different ways.
Arcadia is concentrated in metro areas with bigger dealers. TranSouth has some national accounts, such as AutoNation and CarMax, but most of its business is with dealers in small towns. Arcadia has 17 buying centers. TranSouth has 190 full-service branches.
The newly merged companies - a new name could be in the works - will stick to that two-channel approach, said Matt Hollingsworth, senior executive vice president of U.S. consumer operations for Associates. Staff Reporter Jim Henry spoke with Hollingsworth and Cortes DeRussy, Arcadia's executive vice president for loan originations, last month at the National Automobile Dealers Association convention in Orlando, Fla. Edited excerpts follow.
Simple question: How's it going?
Hollingsworth: I would say we're on target. Everything is at or above our expectations.
DeRussy: On the origination end, there is great enthusiasm.
Do you have a lot of overlap?
DeRussy: We have essentially similar customer bases in a lot of ways, but they are distinct businesses. Arcadia's analysis shows a very small overlap between the dealers.
Do you expect layoffs?
Hollingsworth: There will be no radical changes in serving the marketplace. However, some redundancies will be eliminated.
What do you mean, 'similar customers, but distinct businesses?'
DeRussy: We (Arcadia) are concentrated in metro areas with bigger dealers. TranSouth has some very large, national accounts, but the lion's share of their business is with dealers in smaller - even rural - communities, with lots of branches everywhere. Arcadia has 17 buying centers, with a 'hub-and-spoke' setup, with centralized buying, and some people working out of their homes. TranSouth has 190 full-service offices, where contracts are underwritten, funded, etc. right in those branches. It's a good fit. If either one of us had wanted to continue to go independently, we might have selected each other as partners anyway.
How are the customers similar?
Hollingsworth: Both companies are really in the heart of nonprime. Neither goes after prime, and neither really dips into the real, real bottom of the market. Both companies understand the dynamics of the market they serve and the type of dealer they serve. We really think there's good value in keeping both channels.
Are you concentrated in different regions?
Hollingsworth: Arcadia is more coast-to-coast. TranSouth is more concentrated in the Southeast and California, with some locations in certain other parts of the country.
Are you looking for big-time volume growth?
Hollingsworth: We expect about $250 million in nonprime volume per month, total for the two distribution systems. ... That's about 45 percent TranSouth, and 55 percent Arcadia. ... We were fortunate to get Arcadia at the price we did. That means we don't have to make unrealistic goals and chase unprofitable business. (Note: TranSouth originated about $750 million in auto loans in the first nine months of 1999. Arcadia originated about $1.8 billion worth of loans in the same period. Hollingsworth's projection implies that the total amount of originations will stay about the same, but Arcadia will originate less per month than it did in 1999, and TranSouth will do more.)
Is it fair to say some business that would be unprofitable for Arcadia would be profitable for Associates because Associates has a lower cost of funds?
How about more acquisitions?
Hollingsworth: We would never say never, but we are not looking for acquisitions.
Will securitization continue to be Arcadia's main way to raise capital?
Hollingsworth: We would not rule that out in the future, but it's not in the plans right now. If we decide later it's the right thing to do for Associates - that is, for all of Associates, we might do it.
How many dealerships has each company signed up? I'm also assuming that the '80-20' rule applies - that you do 80 percent of the business with 20 percent of the dealers.
Hollingsworth: TranSouth has about 5,000 dealerships with which it does business; Arcadia has about 7,000.
DeRussy: And the 80-20 rule definitely applies.
Will you change the company names?
Hollingsworth: We're looking at that. We will not change the name of Arcadia to TranSouth. If we decide to put both companies under one name, it will be a new name.
What's your message to dealers? They have to be nervous with what's been going on in the subprime segment: 'Oh, no, not another one!'
DeRussy: Dealers are concerned with two things: whether they're going to get paid and whether you're committed to the auto industry. With some banks, as you know, the latter can be a real question. With Arcadia (Financial Ltd.), they were never in danger of not getting paid, but rumors go around, and when you're an independent company, the rumor mill cooks. Today, we can reassure them on both counts. ... The dealers who look to us for financing can be quite comfortable that Associates is not going to have a change of heart.