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Household to Buy Unit of Transamerica

Merger: The $1.1-billion purchase of the L.A. consumer finance company would also cost some jobs, executives say.

May 22, 1997|NANCY RIVERA BROOKS | TIMES STAFF WRITER

Household International said Wednesday that it will pay $1.1 billion in cash for Transamerica Financial Services, the Los Angeles-based consumer finance arm of Transamerica Corp. that has been on the block for two months.

Household said it would merge the division's 420 offices into its 550-branch Household Finance Corp., the nation's second-largest consumer finance operation. The Transamerica branches would be renamed HFC and there would be some branch closings and layoffs, Household executives said, but they declined to detail the scope of the cuts.

Household is known as a low-cost operator, and William F. Aldinger, Household's chairman and chief executive, said the merger would begin to add to company earnings in the current fiscal year primarily because of cost-cutting.

However, Aldinger added, much of the cost savings would come from sources other than layoffs, including reduction of corporate overhead and technology duplication.

"I don't want people to assume upfront that it means we're going to have wholesale reduction in people," Aldinger said. "There's a lot of corporate overhead and things that will not affect the staff."

Transamerica Financial branches in 44 states, Britain and Canada overlap somewhat with the HFC branch system, Aldinger said. But, he added, "even in the cases where there is overlap, we are thinly branched ourselves."

Transamerica Financial employs 2,300 people, including 392 at its headquarters in the landmark Transamerica Center in downtown Los Angeles, which is owned and primarily occupied by Transamerica Corp.'s life insurance subsidiary. Transamerica's 30 Southern California branches employ 176 people and its 20 Northern California branches employ 124 people.

HFC employs 4,900 people. Household International, based in Prospect Heights, Ill., also has a large credit card business.

San Francisco-based Transamerica Corp., an insurance and financial services company, in March started searching for a buyer for its consumer lending unit, where profit was shrinking. Household quickly responded, and the two firms reached an agreement Tuesday. The transaction, subject to regulatory approvals, is expected to close by June 30.

Transamerica said it would use the proceeds to pay down debt and to repurchase stock. The Transamerica board on Wednesday authorized the repurchase of 6 million shares.

The purchase of Transamerica Financial would increase Household's loan portfolio by 7.5% to more than $50 billion. Transamerica Financial brings with it $3.6 billion in loans, most of them secured by homes.

Household shares rose 75 cents Wednesday to close at $92.625, and Transamerica slipped 12.5 cents to $87.125, both trading on the New York Stock Exchange.

"It fits Household's strategy. It is low risk, and it adds to earnings," said PaineWebber Inc. analyst Gary Gordon.

Household's purchase of the Transamerica unit is expected to add between 15 cents and 20 cents a share to Household's 1998 earnings after expenses, Aldinger said.

The sale comes as rising loan delinquencies hurt the consumer lending business. Industry analysts expect consolidation to continue in the consumer finance industry, with only a few companies, including Associates First Capital Corp., the nation's largest independent consumer finance company, Household and Norwest Corp. likely to remain when the consolidation is complete.

BankAmerica Corp. put its consumer finance unit up for sale in March.

Consumer lending eroded Transamerica's profit last year, contributing to a 3% drop in earnings. The consumer lending unit lost $45.1 million in 1996 compared with operating income of $80.5 million in 1995. Transamerica plans to shift to selling consumer loans from a new centralized lending operation rather than through a costly branch network.

Household said it will sell 8 million to 9 million new shares to help pay for about 80% of the $1.1-billion cash purchase. The remainder will be paid for with borrowed funds.

Bloomberg News Service contributed to this report.

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