Element Financial plans to divest non-core unit, focus on fleet management unit

TORONTO – Element Financial Corp. (TSX:EFN) is putting some of its Canadian non-core operations up for sale as it focuses increasingly on the United States and managing its clients’ fleets of cars and trucks.

The Toronto-based company owns or manages about 1.2 million vehicles in several countries, including 580,000 acquired when it bought GE Fleet — formerly part of General Electric — in a C$8.6-billion deal that closed at the end of September.

“We love the fleet business because of our scale,” chief executive Steven Hudson told analysts on a conference call Wednesday

“We are the big, barking dog — if you will — in the North American sector. That scale brings value to us and our clients.”

Fleet management services — such as buying, financing, maintaining and selling vehicles for business — accounted for 70 per cent of Element’s total assets, or $19.2 billion as of September. That will rise to 75 per cent of assets by the end of 2016.

“Expect us to have news in Q4 or Q1 on tuck-in transactions,” Hudson said.

To provide funds for acquisitions, Element plans to divest a 100-employee Canadian business unit with five offices that provides commercial and vendor financing — a lower-margin operation that’s in stiff competition with the major banks.

The unit oversees $1 billion of finance assets, or about 4.5 per cent of Element Financial’s total asset portfolio. Barclays Capital will advise Element, which expects to have an “actionable plan” by the first quarter of 2016.

“We’ve had significant bank interest in our platform,” Hudson said.

“We think it’s a very attractive business. However the ROA (return on assets) in Commercial & Vendor is less than that of Fleet and we think it’s time to harvest some capital and redeploy that into the fleet business.”

The company will be keeping its U.S. commercial and vendor business unit, which operates in a very different market environment with much more opportunity to earn fees on services — in addition to interest for providing financing.

“In Canada, to be frank, we get into situations where I’m not selling on service, I’m just selling on rate alone and we’ll lose that — we’ll lose that battle all day long,” said Brad Nullmeyer, Element Financial’s president.

In a separate but complementary transaction announced Wednesday, Element has agreed to buy up to US$1 billion of leased railcars over four years from Dallas-based Trinity Industries — building on a 2013 agreement.

“We’re very happy to continue our strategic partnership with Trinity with a multi-year arrangement. However, I have said that that rail business will be sized to the capital requirements of our fleet business,” Hudson said.

In essence, he said, Element’s rail and aviation equipment financing will be an extension of its fleet management activity.

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