Dollar Expands Pawn Lending - Analyst Blog

On Dec 2, diversified financial services company, Dollar Financial Corp. (DLLR) announced that one of its wings, Dollar Financial UK Ltd., has committed to purchase a leading pawn lending Scandinavian company, Sefina Finance AB, for approximately $73 million in cash. While $58 million will be paid immediately, the balance is expected to be paid in instalments in 2011.

Based in Stockholm, Sweden, Sefina has an operating history of more than 125 years. The company provides pawn loans that are primarily secured by gold jewellery, diamonds and watches, through its 16 store locations in Sweden and 12 stores in Finland. Hence, the acquisition appears to be a good fit in Dollar Financial's business portfolio.

The acquisition is expected to be completed once the regulatory approvals are received within 30-60 days. Besides, the Sefina acquisition is expected to be accretive immediately while Dollar Financial is looking forward to update its earnings guidance for 2011.

Meanwhile, Dollar Financial is vigorously pursuing its pawn lending business growth strategy across product and geography, primarily in highly regulated pawn lending markets such as Sweden and Finland. As of September 30, 2010, Dollar Financial had a network of 1,193 stores (of which 1,067 were company-owned) located in the US, Canada, the UK, the Republic of Ireland and Poland.

Moreover, secured pawn loan business has been growing rapidly and Dollar Financial has been expanding with more than 350 stores across the UK. This is due to the fact that pawn loans are provided against a secured asset and hence does not envelop future earnings, which raises the demand for such a product in both developing and underdeveloped economies with low employment rates.

Therefore, Dollar Financial has been tapping on this growing opportunity through mergers and acquisitions. In April 2010, the company acquired Suttons & Robertsons, the fourth-largest pawn-broking business in the UK, for £15 million with additional potential payments amounting to £2.5 million, over the next two years. Further, in August 2010, Dollar Financial agreed to buy Swedish Internet lending business Folkia Group AS for $28 million.

Overall, we believe that though Dollar is on a business shopping spree, risks related to its tax strategies, increased debt obligation and its increased international dependence continue to float on the surface. Nevertheless, solid liquidity, exposure to a somewhat recession-proof sector and cost containment measures will drive growth in future. Dollar competes with CapitalSource Inc. (CSE) and Global Cash Access Holdings Inc. (GCA) in the payday lender industry.

 
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