Recently, Encore Capital Group, Inc. (ECPG) completed the purchase of 50.1% equity stake in Janus Holdings Luxembourg S.a.r.l., an indirect holding company of Cabot Credit Management (CCM). The final consideration of the deal was £115 million ($177 million). The purchase consideration was curtailed from £128 million ($193 million) as announced on May 30, 2013, when Encore Capital initially announced the acquisition.
The change in the purchase consideration was due to an agreement signed by J. C. Flowers & Co. for the redemption of some bridge preferred equity certificates. A fund advised by J.C. Flowers holds the remaining 49.9% equity of Janus. Encore Capital holds the option to buy the complete equity stake of Janus between the fourth and sixth anniversary of the acquisition.
The reduction in the purchase consideration has made the deal more attractive for Encore Capital as it is getting better internal rate of return from the transaction. The company will use its revolving credit facility to finance the remaining part of the purchase consideration.
Encore Capital raised $150 million for the acquisition through the issue of 7-year, 3% convertible notes last week. As per the agreement, CCM will continue to be an individual unit and conduct its operations independently. CCM will hold on to the present workforce and brand name.
The deal is aimed at bringing together the U.S and UK market leaders, Encore Capital and J. C. Flowers, respectively to build a global leader in the debt management market. UK represents the second largest mature debt purchase market in the world and is thus loaded with growth opportunities. Encore Capital has been trying to grab this opportunity and profitably deploy capital in this promising market, which has grown since 2009.
CCM’s strong management, efficient operations, strong relationship with financial institutions and steady growth levels for the past 14 years persuaded Encore Capital to realize their objectives. The operating advantages of CCM are expected to leverage the prosperity of Encore Capital by rendering the existing investments all the more profitable.
Through its specialist businesses, CCM purchases and executes contingency collections and customer tracing. On culmination of the deal, CCM will be exposed to more capital enabling it to purchase more debt and engage in other asset categories. Additionally, greater exposure to resources and expertise from Encore Capital will enhance its operational performance. In the first quarter of 2013, revenues of CCM increased 12% year over year to £42 million or $63.8 million. Revenues are expected to increase further on the back of its alliance with Encore Capital.
As Encore Capital will now own 50.1% stake in CCM, this improvement in CCM’s operations is expected to fortify Encore Capital’s operating performance and thereby bolster growth going forward. The Zacks Consensus Estimate for full year 2013 is currently pegged at $3.59, translating into a year-over-year improvement of 17.6%.
Encore Capital currently carries a Zacks Rank #3 (Hold). Other companies in the financial sector, which look promising at present, are Discover Financial Services (DFS), Regional Management Corp. (RM) and World Acceptance Corp. (WRLD). All these companies carry a Zacks Rank #2 (Buy).
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