Rent-A-Center acquiring Rainbow
By Clint Engel -- Furniture Today, February 8, 2004
Plano, Texas — Rent-A-Center, the nation's largest rent-to-own operator, is getting even bigger with the acquisition of Rainbow Rentals for more than $100 million.
With the acquisition, pending government approval and expected to close in the second quarter, the RTO leader will pick up Canfield, Ohio-based Rainbow's 124 stores in 15 states and $100 million or more in annual revenues.
It's paying a hefty premium, with the publicly held Rainbow's stock price nearly doubling on news of the deal last week. Rent-A-Center will pay $16 in cash per share, plus compensation for holders of options. The companies didn't disclose the exact price but the per-share payment alone will be $94.9 million.
The acquired stores will be converted to the Rent-A-Center name and systems, but few stores are expected to close, said Dave Carpenter, director of investor relations for Plano-based Rent-A-Center. Rainbow stores typically handle such a large volume of customer contracts that it would be difficult to transfer them to an already high-volume Rent-A-Center store, even in markets where both have units, he said.
Rainbow's top three executives, including Wayland Russell, chairman, CEO and co-founder, will leave after the deal closes, Carpenter said.
"Given our track record of successfully integrating acquisitions and our proven business model, we believe that this transaction will create additional value for our stockholders," said Rent-A-Center Chairman and CEO Mark Speese. He said the two companies have similar operating philosophies.
Rent-A-Center, which has 2,651 company-owned stores in the United States and Puerto Rico and 327 franchised ColorTyme and Rent-A-Center stores, plans to pay for Rainbow with cash on hand and borrowing through its senior credit facility.
Speese said Rent-A-Center expects cost savings in advertising, overhead and rental merchandise purchases and believes the deal will add to earnings per share.
General and administrative expenses run about 8.5% of revenue for Rainbow vs. 3% for Rent-A-Center.
"They're very high quality type stores," Carpenter said. "It's just that they weren't earning a lot of bottom-line net income."
In last year's third quarter, Rainbow posted a 4.5% gain in net revenues to $25.4 million and net income of $217,000, down from $335,000 the same period a year ago.
Before the Rainbow deal, Rent-A-Center was estimating it would have revenues this year of $2.3 billion to $2.33 billion. In 2002, the last full year for which it has reported results, it had net income of $162 million.
Rainbow's Russell said in a press release that Rainbow's customers will be treated well and its employees will find growth opportunities with Rent-A-Center.
"As a co-founder of Rainbow 18 years go, I have great pride in our collective accomplishments, which have now culminated with sale of our business to a first-class industry-leader," he said.
In September 2002, another RTO leader, Atlanta-based Aaron Rents, began buying Rainbow Rental stock and hinted that it eventually might want to acquire the entire company. By early 2003, Aaron's held 8% of Rainbow's shares, all purchased for less than $5 each.
With the Rent-A-Center deal boosting Rainbow's stock price, Aaron should realize a $5.5 million profit on its investment of just over $2 million, said Aaron Chairman and CEO Charlie Loudermilk.
Asked if Aaron would have preferred to buy Rainbow, Loudermilk said, "Not at the price Rent-A-Center paid." He called the outcome a "win-win" for Aaron, noting that in addition to generating a stock profit for Aaron, "they're taking a brand out of the market."
About a third of Rainbow's stores are in markets where Aaron has franchise operations and another third are in cities where Aaron has company-owned stores, he said.
Loudermilk said Aaron did make an unofficial bid for Rainbow, but it was for much less than Rent-A-Center is paying, and Aaron never received all the due-diligence information it needed to make a firm bid.
Typically RTO companies are sold for a multiple of their monthly rental income and a 10 to 11 multiple is on the high side, Loudermilk contended. But Rent-A-Center's Carpenter indicated that a multiple of 10 to 12 isn't unusual.
Carpenter would not disclose the multiple for Rainbow, but based on Rainbow's third quarter results, a purchase price of a little more than $100 million would put the multiple at about 12 times rental revenues.
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