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Element Financial already looking to future growth plans after GE deal

The logo of General Electric is pictured at the 26th World Gas Conference in Paris, France, June 2.

Benoit Tessier/Reuters

Element Financial Corp.'s $8.6-billion acquisition of part of General Electric Co.'s fleet management business is not the end of the company's growth plans, according to chief executive Steve Hudson, who went so far as to name his next acquisition targets.

"This message of growth at Element is: It's not over, it's not over, it's not over," said Mr. Hudson, on a conference call with analysts Monday. "They say you have to say something three times," he added.

According to Mr. Hudson, the Toronto-based equipment finance company is still in expansion mode, both through more acquisitions as well as possible advantages from its global network of fleet leasing partners.

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The GE deal boosts by 580,000 the number of vehicles Element owns or manages, with assets in the United States, Mexico, Australia and New Zealand. Mr. Hudson said Element will have 1.2 million vehicles at the end of September, when the deal is set to close. The two companies entered into exclusive negotiations on the deal, an opportunity stemming from Element's acquisition of GE's Canadian fleet portfolio in 2013.

The value of Element's net earning asset portfolio – the income-producing assets owned by the business – will swell from $10.8-billion to $17.9-billion. The company predicts that synergies such as merging facilities and improved funding costs will save $90-million to $95-million in 2016 and 2017.

Much of Element's focus is on its fleet management business, which helps finance, maintain and track vehicles such as vans and trucks for companies that have a mobile work force or are transporting goods. The company also offers technology to make fleets more effective, such as tracking drivers' job completion, reducing mileage and ensuring health and safety standards are being met.

Right now, 73 per cent of the company's net earning assets are in its fleet unit, which the company sees as a lower-risk, predictable business with higher returns on equity and assets.

While Element will focus on integrating the GE operations, Mr. Hudson already has his eye on a couple of other businesses that will likely come to market in the next year to 18 months. And the emphasis will continue to be on fleet management. "We're happy with our existing vendor, aerospace and rail [business lines]," Mr. Hudson said in an interview.

The first asset he's watching is LeasePlan Corporation N.V., a Dutch fleet manager that is part owned by Volkswagen AG, the German car giant. The company has a large European and Latin American business, but "we don't have an interest in LeasePlan outside of North America," Mr. Hudson said.

And then there's "Hertz, which is going through a restructuring with a new CEO, and has a fleet company – we would expect that to come on the market at some point," said Mr. Hudson of Hertz Corp.'s subsidiary Donlen.

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At the same time, Element is looking to extend its international network through a deeper partnership with Paris-based Arval, a subsidiary of BNP Paribas Group.

About one year ago, Element struck a deal to expand into the United States with the $1.4-billion purchase of PHH Arval, which was then PHH Corp.'s fleet management business. The acquisition gave Element a foot in the door to the more than 14-year alliance between Arval and PHH Arval, serving clients across Europe and North America.

Mr. Hudson said competing for GE assets against this existing partnership didn't makes sense, so Element helped Arval strike a memorandum of understanding for Arval to acquire GE Capital's European fleet operations with more than 160,000 vehicles in 12 European countries, valued at $3.3-billion.

"Going forward, it means we have more purchasing power together," said Mr. Hudson, who cited maintenance, parts and fuel as potential areas of savings.

The Element-Arval Global Alliance, which also includes companies such as Avis Fleet Services in Southern Africa and Sumitomo Mitsui Auto Service in Japan, will manage customer fleets in more than 40 countries. GE also has a fleet business in Japan, but Mr. Hudson said that was never an offering on the table in Element and Arval's negotiations.

As fleet businesses continue to consolidate, Mr. Hudson said, the industry is mirroring what happened to credit cards in the 1980s when financing through securitization and other efficiencies accelerated the growth of the largest players.

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The GE deal will be funded in part through $2.7-billion in shares and bonds Element came to market for last month. But that's it for a while – the company said it's not coming back to the market to raise equity any time soon.

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More

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