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Shares of consumer-lending company OneMain Holdings Inc. (NYSE: OMF) are surging on news that Apollo Global Management (NYSE: APO) and Varde Partners are buying a 40.5% stake in OneMain from Fortress Investment Group. Shares were up about 26% as of 1:30 p.m. EST.
OneMain Holdings has been an "on again, off again" stock for the auction block. As recently as Oct. 9, the company was rumored to be up for sale, as the The Wall Street Journal broke the news that talks were going on. Fortress owned about 55% of the company at the time, giving it a big incentive to sell the company as a whole. (Fortress subsequently whittled its stake down to 40.5% through accelerated stock sales.)
At the time, a complete sale of OneMain seemed likely. I wrote then that "tight credit spreads and loose terms in the corporate debt markets make OneMain a potentially attractive acquisition for creative acquirers, particularly for private equity firms, which are enjoying some of the loosest terms on acquisitions not seen since the buyout boom of the mid-2000s."
Less than one month after OneMain reportedly went up for sale, it became apparent that talks to sell the business had been scuttled. On Nov. 7, OneMain Holdings wrote in its quarterly report that it "recently completed an evaluation of certain alternatives to maximize stockholder value, including a sale of its business. The evaluation has concluded and the Company continues to implement its previously disclosed strategies." In other words, a full sale of the business was off the table.
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Of course, we now know that Fortress still wanted out, even if it meant selling only its portion of OneMain Holdings. Funds managed by Apollo and Varde Partners are buying Fortress Investment Group's stake in OneMain Holdings for $26 per share, in a transaction worth approximately $1.43 billion.
It's interesting that shares of OneMain Holdings soared to more than $33 per share on news a major investor was buying in at just $26, a slight discount to the closing price on Wednesday. Why would OneMain Holdings surge above the price at which a major investor is buying in?
I can only speculate. But four things stick out:
- Apollo and Varde Partners' investment is a vote of confidence in the lender's business and operating results, at a time when subprime credit quality has generally deteriorated across the industry.
- The Fortress sale removes a big overhang for the stock. Investors may have been staying on the sidelines, fearful of a secondary public offering that could pummel shares of the consumer lender if Fortress wanted out at any price.
- Apollo and Varde Partners may decide to acquire the remaining portion of OneMain Holdings, and thus take it private. I consider this a low-probability event.
- Private equity investments may make it more likely that OneMain Holdings is again put on the auction block for a complete sale. After all, private equity funds only exist for a few years before they have to liquidate to return cash to their investors.
According to documents filed with the Securities and Exchange Commission, funds and affiliates related to Apollo's megafund, Apollo Investment Fund VIII, are apparently leading the transaction. Apollo's VIII fund closed to fundraising in December 2013, and such funds generally operate for about ten years after fundraising.
When the day comes for Apollo to cash in on its OneMain Holdings investment, minority shareholders may come along for the ride. That could be years away, but for now, the market seems happy with Apollo and Varde as new major investors in OneMain.
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