Monday, November 23, 2009

People's United "buys some balance sheet" (FIF, PBCT)

No sooner did Financial Federal (FIF) agree to be acquired by People's United (PBCT), than the "securities version" of ambulance chasers showed up.:

NEW YORK--(BUSINESS WIRE)--Levi & Korsinsky is investigating the Board of Directors of Financial Federal Corp. (“Financial Federal” or the “Company”) (NYSE: FIF - News) for possible breaches of fiduciary duty and other violations of state law in connection with their attempt to sell the Company to People's United Financial, Inc. ("People's United") (NasdaqGS: PBCT - News). Under the terms of the transaction, Financial Federal shareholders will receive $11.27 in cash and one share of People's United common stock. Based on the closing price of People's United on November 20, 2009, the transaction values Financial Federal shares at $27.74, for a total transaction value of approximately $738 million.

The investigation concerns whether the Financial Federal Board of Directors breached their fiduciary duties to Financial Federal stockholders by failing to adequately shop the Company before entering into this transaction and whether People's United is underpaying for Financial Federal shares, thus unlawfully harming Financial Federal stockholders.

In fairness to the ambulance chasers, they might have a point. People's United looks to have acquired a commercial lender at very attractive prices, about 1.1times book value. As they themselves say in the release, the terms are very attractive. And the excess capital cited below is why by title said they're "buying" some balance sheet.

People's United expects the transaction to be significantly accretive to operating earnings in 2010 and to have an IRR greater than 20%. Given Financial Federal's significant excess capital, the transaction is expected to have a slight positive impact on People's United's industry leading capital levels on a pro forma basis.

It should be very difficult for Financial Federal to look its investors in the eyes and explain why the seller can achieve a return of 20% on this investment. As in, "why did we take the other side of this trade?"

A perusal of Financial Federal's recent 10-q offers insight into how they have remained both sturdy and profitable despite this difficult environment. They completely shy away from assets with questionable useful lives:

-->>Our primary focus is the credit quality of our receivables. ...
-->>We focus on financing equipment with a remaining useful life longer than the term financed, historically low levels of technological obsolescence, use in more than one type of business, ease of access and transporting, and broad, established resale markets.  
-->>We do not finance or lease aircraft or rail cars, computer related equipment, telecommunications equipment or equipment located outside the United States, and we do not lend to consumers.

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