Carfinco goes Public

One of the best-performing local plays on the stock market, Carfinco Income Fund (TSX: CFN. UN), has put itself on the auction block, the Edmonton-based auto finance firm announced Wednesday.

Carfinco Income Fund (TSX: CFN. UN) said it has retained FBR Capital Markets & Co. to assist in “identifying, examining and considering a range of strategic alternatives” to maximize unitholder value.

“These alternatives include, but are not limited to, the potential sale of all or a majority of the assets or units of Carfinco,” the company said, and its board has authorized FBR to contact prospective buyers.

“Carfinco is a leading and highly profitable non-traditional auto lender and we see significant potential for growth and expansion of our product offerings,” Carfinco chairman David Rosenkrantz said in a release.

“It’s just a logical step in our growth in determining what’s best for the fund and its unitholders,” Tracy Graf, Carfinco CEO and co-founder, said in an interview.

He said the firm is exploring opportunities and there is no definite plan to sell Carfinco.

Carfinco is looking at alternatives, including being acquired by a larger entity, as a way to maximize growth, currently limited by access to capital, Graf said.

“We’ve stated in the past in news releases that we plan on growing by 20 per cent annually,” he said.

“Part of that 20-per-cent growth is constrained to that amount by our lending syndicate and their comfort level on how fast we can grow,” Graf said.

“If there was access to capital, the fund could grow the portfolio a lot faster. We see opportunities to expand our product where we could actually grow the portfolio more than 20 per cent per year if we chose to or if we had the opportunity to.”

Graf noted that VFC Inc., a competitor in the high-risk vehicle-purchase finance industry, was purchased in 2006 by the Toronto Dominion Bank, and Travellers Financial’s non-prime automotive business was acquired by Scotiabank.

Both non-prime automotive portfolios are now “north of a billion dollars,” Graf said. “With the right buyer, they could see that kind of growth in portfolio,” he said of a potential Carfinco buyer.

“At this point in time, we may not have the same access to capital that a private equity fund or someone else would already have readily available and wanting to deploy.”

Carfinco provides consumer loans to buyers of vehicles who are unable to obtain financing through banks or other conventional lending sources. “We’ve proven the fact that we’re able to effectively do business in the non-prime finance arena in the automotive sector.”

Graf said he doubted any acquisition would result in operational changes or a move from Edmonton. Management, including Graf, would likely stay on with any new owner, he said.

“If someone were to come along and acquire Carfinco, they’re not just acquiring the portfolio, they’re acquiring the platform. The platform would include the technologies we’ve developed and the personnel of the company. I would envision that if someone were to acquire Carfinco — and that’s an ‘if’ — they would leave everything status quo.”

GMP Securities analyst Stephen Boland said in a note to clients that possible buyers include U.S. lenders looking to enter the Canadian market, another Canadian lender looking to expand, or a private-equity firm.

Graf agreed with that assessment of potential buyers. “If someone was looking for a platform to do business in Canada in the automotive finance industry, we’re definitely more than capable to do so.”

Carfinco doesn’t market its loans directly to borrowers. Rather, its products are offered by a network of 1,200 vehicle dealerships across Canada, including independent used-car lots and franchisees that mainly sell Ford, GM or Chrysler products.

The firm is in solid financial shape after struggling through 2008, Graf said. “We righted the ship in 2009. In 2008, we showed some losses and a lot of it had to do with some non-cash entries and increasing the allowance for credit losses in 2008. But we’ve had numerous quarters now of record net earnings.”

In late-afternoon trading Wednesday on the Toronto Stock Exchange, Carfinco’s units were up 15 cents apiece to $7.14 on volume of 120,241 units. The company’s units have more than tripled in value over the past year, giving the company a current market value of about $170 million.

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