There is a very high likelihood that QC Holdings, Inc. (Nasdaq: QCCO) will be acquired for over $6 a share – much higher than today’s price of $2.43.
QC Holdings provides short-term credit to consumers (payday lending), part of a $40 billion industry in the US. It was founded in 1984, and has 432 stores across 23 states. It also owns a rapidly-growing Canadian internet payday lender. QCCO stock just finished a year of consolidating its operations and paring down its debt. It represents an outstanding opportunity for a buyer, which will most likely come out of Mexico (see below).
Before this acquisition occurs, the regulatory environment in the US for payday lending must be resolved. There is a misguided belief that the CFPB will kill the product, following the bureau’s supervisory exams of the industry in 2012. The CFPB released a fatally flawed white paper in April of 2013, in which it was roundly (and rightly) criticized for publishing results based on a proven oversampling of high-frequency users and under-sampling low-frequency users. One former CFPB employee told me that once the bureau realized its error, it went back to the industry to correctly mine information. Industry service providers, which have data on tens of millions of transactions, are assisting.
While the payday lending industry has opponents in the Obama administration, CFPB Director Richard Cordray is his own man. He has a career beyond the CFPB and will not overstep. The threat of litigation, and of being lumped in with other administration scandals, will allow him to truly do what he thinks is best for both consumers and the industry. To that end, there will be nothing material to come out of the CFPB as far as rule-making. The most likely scenario, and the wisest, will be codify all the consumer protections that the payday loan trade association already manifests in every transaction, as part of the trade association’s list of Best Practices. At the state level, QCCO stock’s stores are in states that have remained friendly to payday lending for many years.
Why will QC be acquired? It is capital-restricted. The industry is mature so growth can only be achieved via acquisition, but QCCO doesn’t have the capital for an acquisition. It doesn’t have the capital to open new stores. The stock price is too low to raise equity capital. It can’t raise debt capital, as the company had to reduce its credit line and take a loan from its Chairman.
There is no option for the company other than to sell itself. I expect the buyer will be Grupo Elektra, the Mexico-based financial services and retail conglomerate that purchased the largest payday lending chain in the United States – Advance America’s 2000+ stores -- in 2012. QCCO stock is a direct analog to Advance America, as they are both monoline operators. Advance America’s $780 million acquisition price represented 1.3x annual revenues, 6x EBITDA, and 3.1x receivables and fees due.
QCCO stock has 17.35 million shares outstanding. On the basis of Advance America’s buyout metrics, the minimum buyout price I would expect is $6.34 per share.
QCCO’s TTM EBITDA was $18.4 million. 6x = $110 million = $6.34 per share
That’s why I see a minimum upside of 161% on QC Holdings, with minimal downside. The company’s tangible book value, when you consider that most receivables are collectable, assign $8 million to “other assets”, and about $6 million for the unrealized value of the internet operation, and then back out liabilities, leaves $1.94 per share.
I consider the buyout likelihood to be very high, due to the lack of other options and because the majority owner (Founder and Chairman Don Early) is 71 years old. He owns almost half the company. It’s been his baby for thirty years, so he won’t let it go at a fire sale price. I think this is a terrific, limited-risk opportunity with substantial upside likelihood.