Duo Bank of Canada is acquiring consumer finance company Fairstone Financial Holdings Inc. for an undisclosed amount of money, marking the bank’s first major deal since it was sold by the retail giant Walmart Inc. to a group of investors in early 2019.
The acquisition will give Duo Bank, formerly known as Walmart Canada Bank, a significant subprime lending business. Fairstone has about $3-billion in assets on a consolidated basis, offering mortgages and personal loans in 237 lending branches across Canada, as well as vehicle loans in third-party auto dealerships.
To date, Duo Bank’s main line of business has been its Walmart-branded credit card and rewards program. It also began taking bank deposits last September.
Montreal-based Fairstone, formerly called CitiFinancial Canada, was once the Canadian consumer finance arm of U.S. bank Citigroup Inc. In 2017, Citi sold the company to a group of investors led by U.S. private equity firms J.C. Flowers & Co. LLC and Varde Partners, Inc., which rebranded it Fairstone.
Fairstone focuses on lending to individuals who struggle to secure loans from mainstream banks, often because of poor credit scores. That means Fairstone charges higher interest rates. On its website, it advertises first-mortgage refinancing starting at an interest rate of 12.99 per cent; unsecured personal loans start at 26.9 per cent.
"There is a very large under-served market in the Canadian population, and the focus for Duo Bank and Fairstone in combination is really to provide access to quality financial products to that under-served market in Canada, that typically isn’t a good fit for the large banks,” said Trudy Fahie, chief executive of Duo Bank.
Toronto-based Duo Bank is backed by Canadian financier Stephen Smith and U.S. private equity firm Centerbridge Partners, L.P., who together bought the business from Walmart last year. The Ontario Teachers’ Pension Plan also became a significant investor in Duo Bank as part of the Fairstone acquisition.
“This transaction creates a strong and diversified Canada-based financial services entity that has robust finances, operational excellence and a history of delivering topline and earnings growth‚” Jane Rowe, Teachers managing director of equities, said in a news release.
Mr. Smith, who is the chairman and chief executive of mortgage lender First National Financial Corp. and also the largest shareholder in alternative lender Equitable Bank, has worked with Teachers on previous deals. In 2010, Mr. Smith and Teachers’ teamed up to acquire American International Group Inc.’s Canadian mortgage business, which was rebranded Canada Guaranty Mortgage Insurance Co.
Teachers made a bid for CitiFinancial when it went up for sale in 2017. The pension plan declined to comment on the Fairstone deal beyond the news release.
RBC and CIBC advised Duo Bank on the transaction, while Citi, National Bank and Barclays advised sellers J.C. Flowers and Varde. Canadian legal counsel included Torys LLP; Osler, Hoskin & Harcourt LLP; and Stikeman Elliott LLP.
The transaction is expected to close in the second quarter of 2020, subject to regulatory approval.