Lone Star to Buy DFC Global - Analyst Blog

DFC Global Corp. DLLR will be taken over by an affiliate of Lone Star Funds for $1.3 billion. Following the announcement, shares of the diversified financial service provider increased 5.23% to close at $9.45 yesterday.

Though DFC Global's board of directors approves the buyout, it requires the affirmative vote of the holders of a majority of the outstanding shares. The approval will be sought at a special meeting of stockholders. The acquisition is expected to see light in the third quarter of the current year. Following the closing of the deal, DFC Global will become a privately held company.

The purchase consideration of $1.3 billion, which includes assumption net debt, translates into $9.50 in cash for each share of DFC Global's common stock. The purchase price per share represents a 5.8% premium on the closing price on April 1, 2014, and a 12.3% premium to DFC Global's 30-day volume weighted average stock price for the period ended April 1, 2014.

Formerly known as Dollar Financial Corporation, DFC Global was founded in 1990 and is headquartered in Berwyn, PA. DFC Global provides a range of consumer financial products and services to under-banked consumers. DFC Global had a network of 1,532 stores (of which 1,522 are company-owned) located in the U.S., Canada, UK, the Republic of Ireland, Sweden, Finland, Spain, Poland and the Czech Republic.

The acquisition comes with immediate cash value to DFC Global's shareholders. DF Global expects to capitalize on Lone Star's broad-based financial and retail expertise to provide enhanced service to its customers.

Of late, DFC Global has been facing headwinds in its U.K. operations. Due to new loan rollover limitations (three loan rollovers per customer), several outstanding short-term consumer loans in the U.K. became immediately due, resulting in a temporary ‘credit crunch' for the customers. As a result, the company is facing more loan defaults in its U.K. business, which in turn is weighing on its earnings. In anticipation of the increasing number of loan defaults, DFC Global constricted the lending-underwriting norms, which again is weighing on loan growth in U.K. Additionally, the company expects to incur expenses in the range of $10.0 million–$15.0 million to support ongoing regulatory-related activities, including regulatory advisory costs, legal opinions and analysis, and audit and regulatory compliance costs in fiscal 2014.

In a separate development, DFC Global further slashed its fiscal 2014 expectation to account for effects of the transition in the U.K. to a new regulatory environment, continued unfavorable trends in the value of the Canadian dollar with respect to the U.S. currency, and decline in gold commodity prices. It now expects operating earnings per share between 4 and 12 cents, down from the previous guidance of 35–80 cents per share. The Zacks Consensus Estimate is currently pegged at 43 cents. We expect the number to tumble as analysts revise their estimate in the light of lowered guidance. Adjusted EBITDA is also trimmed to a range of $151.0 to $156.0 million, from $170.0 million to $200.0 million guided earlier. During its fiscal second-quarter earnings release as well, DFC Global had lowered its fiscal 2014 guidance.

Alongside, the company expects to generate revenues in the in the range of $248.0 to $252.0 million and adjusted EBITDA in the range of $34.0 to $36.0 million in the third quarter of fiscal 2014. The company estimates third-quarter bottom line to be between loss of 4 cents and breakeven. The Zacks Consensus Estimate for the quarter is pegged at 9 cents.

DFC Global currently carries a Zacks Rank #4 (Sell). Better-ranked stocks worth considering are Apollo Residential Mortgage, Inc. AMTG, Euronet Worldwide Inc. EEFT and Portfolio Recovery Associates Inc. PRAA. While Apollo Residential and Euronet Worldwide sport a Zacks Rank #1 (Strong Buy), Portfolio Recovery carries a Zacks Rank #2 (Buy).