Debt Buyer Consolidation - Encore Capital and Asset Acceptance Transaction

Michael Lamm

It is not everyday that one of the largest and well-known U.S. publicly traded debt buyers, Asset Acceptance Capital Corp. (NASDAQ: AACC), announces that it will be acquired by one of its publicly traded competitors, Encore Capital Group, Inc. (NASDAQ: ECPG). But it’s not all that surprising.

Assuming the transaction closes in June, the debt buying industry will be down to three publicly traded debt buyers – Encore Capital, Portfolio Recovery Associates (NASDAQ: PRAA), and Asta Funding (NASDAQ: ASFI). There are also a handful of large private or private equity-owned debt buyers left in the industry.

Wave of Consolidation

We have been predicting for some time that a wave of consolidation was coming among the publicly traded and large debt buyers driven by scarcity of volume to purchase at attractive prices, high costs of capital and don’t forget the regulatory environment which has a microscope on this part of the ARM industry – the perfect ingredients for consolidation. We anticipate seeing a number of these types of transactions take place over the next 12-18 months, not only with the large players but many of the small and mid-size debt buyers who are realizing that they may better off if they exit and sell off their portfolios now rather than wait it out. Additionally, the CFPB will be ramping up its oversight of the ARM industry, which will also be a key driver for many of the debt buyers to exit. Those debt buyers who fall into the CFPB “large participant category” who are not prepared to make the necessary compliance enhancements will be more inclined to consider a sale of their portfolios.

With volume being as scarce as it is along with the regulatory scrutiny that the banks and credit card issuers are facing surrounding the sale of debt, the Asset Acceptance deal couldn’t have lined up better for Encore Capital. As a result of this proposed transaction, Encore has essentially covered its $400M budget to purchase receivables in 2013 with one transaction. If they didn’t take down Asset, they would be out there fighting like the next debt buyer to get their next portfolio purchases to feed the machine.

If you are looking for additional insights into the Asset-Encore transaction, click here for the Special Transaction Announcement Call transcript. You will need to register on the site (it is free) to access the full transcript.

Growth Expectations

The consolidation wave is only going to take these debt buyers so far and then what’s next? If you look out 3-5 years from now when this market has been further consolidated, by companies like Encore, what are the investment thesis and growth plans for these companies? Where do these larger players go to achieve their 15-20% annual earnings expectations? Do they go and try to aggressively expand in Europe, South America or Asia that are less sophisticated but offer the growth potential the street will want to see? Do they follow the lead of Portfolio Recovery Associates and go international and diversify into other asset classes?

As always, comments/feedback is always welcome!

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s M&A, valuation and strategic advisory team. Michael can be reached directly from Kaulkin Ginsberg’s Philadelphia, PA office at 240-499-3808 or by email. You can also read his blogs, follow him on Twitter, or network with Michael.