Purchase Could Shake Up Avco Financial

It’s too soon to tell officially, but the world headquarters of Avco Financial Services in Costa Mesa is probably headed for a shake-up in the aftermath of its acquisition by rival consumer finance giant Associates First Capital Corp.

A merger of the two companies’ headquarters into Associates’ offices in Texas is not out of the question. If it happens, it would be a double blow to Orange County, robbing it of hundreds of jobs and a prestigious corporate tenant whose presence for the past 30 years has helped business recruiters draw new companies.

“We’re always seeking to use those household names as part of our marketing bag of tricks, to help attract other businesses,” said Gary Miller, economic development specialist at the Orange County Business Council in Irvine.

The $3.9-billion tentative deal, announced Tuesday, would be part of an ongoing string of financial service industry consolidations as strong players, like Associates, look to pick up the customers and revenue streams of weaker contestants like Avco, a unit of Textron Inc.

Analysts say its is all part of the natural order of things--a thinning of the herd that keeps the industry healthy.

“Lending has gotten more competitive, and the weaker companies are seeing their returns decline, so they are opting to sell out,” said Jeffrey Evanson, an analyst at Piper Jaffray Inc. in Minneapolis.

Like other consumer finance companies, Avco--which has been in business more than 70 years--loans money for used cars, appliances and items purchased on installment plans at rates higher than prevailing bank rates.

Associates has been picking up smaller financing companies to help boost its revenue since being spun off from Ford Motor Co. this year, Evanson said. So far, it has not been doing much dismantling of its acquisitions, but none have been as big as Avco or had such large corporate structures.

So Avco’s 720 headquarters workers, as well as some 8,000 employees in branch offices worldwide, are likely to spend the next few months waiting for shoes to drop.

Associates said that it plans to keep the Avco name alive for now but will likely close some branch offices in markets where both companies are active. That means 20% to 30% of Avco’s branch offices could go, said Robert Napoli, an analyst at ABN Amro Inc. in Chicago.

Avco, with 1,265 branch offices and 2.5 million customers, will add $1.85 billion in annual revenue to Associate’s $8.3 billion. Associates has 2,570 offices and 128 million customers. The combined companies will have an estimated $72 billion in assets--about $9 billion coming from Avco--with consumer financing accounting for more than $50 billion.

Avco has branch offices in Anaheim, Tustin and Fountain Valley while Associates has offices in Anaheim and Santa Ana. About two-thirds of Avco’s profits now come from overseas operations.

The purchase, which still must receive approval from federal and state regulators, would give Associates a presence in seven new nations and increase its reach to 16 countries.

Associates already has said it wants to cut $90 million from its corporate overhead and $110 million in other costs after the deal is completed next year.

Avco officials could not be reached for comment. A spokesman at Associates’ headquarters in the Dallas suburb of Irving, said it would be months before a specific plan is developed that would spell out which operations must be eliminated or dramatically trimmed to achieve that goal.

But historically, the company being acquired absorbs most of the cuts.

After buying Beneficial Finance Corp. this year for $8.4 billion in stock, for example, Household International Inc. closed scores of Beneficial branches in a bid to trim operating expenses by 42%. And Household closed 306 of Transamerica Corp.’s 400 consumer finance offices after acquiring that company last year.

Avco was sold after several years of disappointing returns. Textron expects its subsidiaries to grow by about 8% a year and Avco has been performing at about half that pace, analysts say.

Textron officials had said in June that they were seeking a buyer for Avco because of the premium prices being paid for lending firms as part of the industry consolidation. Household, for example, paid a hefty 4.8 times book value--tangible assets minus liabilities--to acquire Beneficial.

Associates outbid Household, General Electric Capital Corp. several other finance companies to win Avco at a price that is 3.3 times the company’s book value.