TD Golly GEe
Impact: POSITIVE Management's forecast EPS accretion at 20% is in line to slightly better than the street was anticipating from this transaction reflecting: a) growthin fee revenue, b) integration savings and, c) lower funding costs. EFN retains the financial flexibility (low leverage) to participate in the further consolidation of the Fleet business in North America and Australia. Although EFN's market share in NA is 40% of Fleet management, the company's market share of Fleet leasing is 20% and we believe that it is Fleet leasing that attracts the greater scrutiny with respect to competition regulations. Element has solidified its relationship with Arval and in this way has enhanced its product offering to global fleet operators. TD Investment Conclusion Our target price and long-term outlook on profitability are leveraged to the following: 1) strong growth in finance receivables, which is highly dependent on management’s capacity to leverage its relationships in Element’s four verticals, particularly in Fleet and Rail; 2) reliable and increasingly diverse sources of funding, including the potential for an investment grade credit rating from a major rating agency; 3) management’s demonstrated and stated intention to limit liquidity, interest rate mismatch, and credit risk; and 4) its highly scalable infrastructure, which should drive much lower operating expense ratios over time. Details EFN is paying $8.6Bn to acquire the NA and Australian/NZ assets. The company does not come with debt. The purchase price is split between $7.1Bn in earning assets ($5.3Bn in NA; $1.8Bn in Australia/NZ); $300mm in working capital and $1.2Bn in goodwill. Excluding the working capital, the company is paying $1.2Bn ($8.3Bn less $7.1Bn) for $7.1Bn in assets or ~18% of assets. This is consistent with the amount paid for PHH.