There is speculation Element will look into buying General Electric assets after CEO Steve Hudson said GE’s decision could provide opportunities for all players in the commercial-finance sector.J.P. MOCZULSKI
Canadian investment banks are stepping up to buy $2.2-billion worth of Element Financial Corp. shares and bonds – without knowing what the company plans to do with the money.
The offering is split into three tranches: $1.55-billion of subscription receipts, $500-million of convertible debentures and $150-million of preferred shares.
The deal is unusual for two reasons. First, it is one of the biggest Canada has seen in recent years, and that means the banks are taking on a large risk because they would be on the hook for any unsold shares. Secondly, Element is financing itself in a unique way. Typically, an issuer will state its intended use of proceeds when announcing a deal – to help investors decide whether the money will be put to good use. In this case, Element is selling subscription receipts and has not stated what they will be used for. Such securities are used to help finance acquisitions, but the company has not identified a target, simply saying it has six months to strike a deal.
"While [Element] is regularly engaged in discussions regarding possible acquisition opportunities, the company has not entered into any definitive agreement for an acquisition requiring the use of the net proceeds of the offerings," the issuer said in a statement.
Once a target is identified and the deal closes, the receipts automatically convert into common shares. If the deal does go through, the investors have to accept whatever it is that Element plans to buy; but if the deal doesn't close, for whatever reason, the financing is effectively cancelled and the investors get their money back.
Although Element is staying mum about its intention, there has been widespread speculation that it would look at General Electric Co.'s assets. In April, GE said it would look to sell most of its financial-services arm, GE Capital Corp., within two years, returning as much as $90-billion (U.S.) to shareholders as it focuses on its core industrial business.
Among the businesses being discharged are GE's fleet leasing, railcar leasing, commercial and vendor lease-financing businesses, all of which compete with Element, said Tom MacKinnon, an analyst with BMO Nesbitt Burns, in a note to clients in April.
Mr. MacKinnon also said the fleet business would likely be among the most appealing to Element. This business provides commercial-car and truck financing and fleet-management services to customers primarily in the United States and across Europe. With $9-billion in assets, it is much bigger than Element's $5-billion fleet portfolio, he said.
On Element's first-quarter earnings call in May, chief executive Steve Hudson called the GE announcement interesting at a time when there is consolidation in the marketplace, fuelled by businesses seeking economies of scale. "This is the table that has already been set when GE decided to take the step of scaling back the focus of GE Capital," Mr. Hudson said.
"In terms of how this impacts Element, without a doubt the decision will fundamentally change the landscape of the commercial-finance industry," he added. "This transformation may create opportunities both near and long term for all industry players."
The speculation comes nearly a year after Element bought PHH Corp.'s auto fleet-leasing business, PHH Arval, for about $1.4-billion. To do so, Element raised $1.1-billion at the time.
GE Capital Solutions originally planned to buy PHH Corp. in a $1.8-billion deal in 2007 alongside an affiliate of private-equity firm Blackstone Group, which would have boosted its fleet portfolio through the addition of PHH Arval. But when Blackstone failed to get the necessary financing in 2008, the deal fell through.
GE and Element have also done business together. In 2013, Element acquired GE Capital's Canadian fleet portfolio and said the two would form a "strategic alliance" to deliver vehicle fleet financing and management services to customers who work on both sides of the Canadian-U.S. border.
Toronto-based Element built its business on enabling automotive fleets, rail companies and other firms to finance equipment for commercial use. Mr. Hudson has said that where large banks once dominated the space, the financial crisis saw them step away from it.//
BMO Nesbitt Burns is the lead underwriter for the new bought deal, getting help from a large syndicate of investment banks to share the risk, and Infor Financial Group Inc. is acting as a financial adviser to the company.
Tim Kiladze