Eagle Finance Corp. (A)

Abstract

This case and its companion (UVA-F-1102) provide comprehensive coverage of a firm's decision to undertake an initial public offering (IPO). The company is a nonregulated financial firm in a rapidly growing area of consumer finance (high credit-risk automobile loans). The A case follows the firm from its first meeting with investment bankers to the determination of a preliminary IPO price range. In the B case, the firm's "road show" encounters a "cold-issue" market, and Eagle is unable to sell its shares at a price near the preliminary file range. Management is confronted with the tough choice of whether to proceed with the IPO or cancel it. The cases provide a rich opportunity to compare management's internal valuation of the firm (derived from market multiples and discounted cash-flow analysis) with the market's assessment of value. Excel spreadsheet files are available for use with this case (UVA-F-1095X) and its teaching note.

Excerpt

UVA-F-1095

Rev. May 7, 2012

EAGLE FINANCE CORP. (A)

“I know I'm going to leave some money on the table, I just hope it's not too much,” lamented Ronald Clonts, co-owner and president of Eagle Finance Corp., at a meeting held in April 1994 to discuss the firm's pending initial public offering (IPO). Also present at the meeting were Charles (Chuck) Wonderlic, chairman and CEO of Eagle Finance, Robert Braasch, CFO, and Eagle's investment bankers, the Chicago Corporation and Kemper Securities. The parties met to discuss several matters that needed to be resolved before formal registration of the IPO with the U.S. Securities and Exchange Commission (SEC) could take place, including, most importantly, agreement on the value of Eagle's shares.

Description of Business

Eagle Finance specialized in non-prime automobile lending, a rapidly growing area of consumer finance. The company, headquartered in suburban Chicago, purchased and serviced used-car receivables originated by franchised cars dealers. Its main customers were individuals with problematic credit histories, which limited their use of bank lending or other traditional forms of financing. Loan applications for the used car were completed at the dealership, and then faxed to a service center for approval. Applications went through an intensive underwriting process that included a credit check, telephone interview, and employment verification. Roughly half of the loan applications received by Eagle were accepted, usually within several hours' time.

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Keywords: consumer loans, security analysis, valuation