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HSBC to Acquire Household in $14.2-Billion Deal

Acquisition by the London-based firm would expand its U.S. presence but expose it to risker businesses.

November 15, 2002|From Times Staff and Wire Reports

HSBC Holdings said Thursday that it will buy Household International Inc., owner of the Beneficial and Household Finance brands and the largest independent U.S. consumer finance company, in a deal valued at about $14.2 billion.

The all-stock deal puts London-based HSBC, one of the world's biggest banks with long-standing U.S. ambitions -- including in California -- in 46 states, adds millions of customers and makes HSBC's credit card arm a global powerhouse.

Although a larger U.S. presence cushions HSBC from a slump in Asia and Latin America, it also exposes the conservative bank to debt-ridden U.S. consumers and one of Household's riskier businesses -- lending to people with patchy credit histories.

Prospect Heights, Ill.-based Household, a leading credit card, auto finance and mortgage lender focused on the so-called subprime market, has found it increasingly costly to raise funds in capital markets because of concerns about possible loan losses in the slack economy.

Household, which was started in a Minneapolis jewelry store in 1878, also has fought charges it duped low-income borrowers into buying high-interest rate loans.

Last month it agreed to pay back a record $484 million to customers in a multi-state settlement of such charges. Executives said the company was wrapping up the settlement issue and HSBC had no major concerns about this.

Household agreed in January to pay $8.9 million in penalties and refund $3 million to California consumers, but California Corporations Commissioner Demetrios Boutris said regulators "are not satisfied" the refunds have been made in full, suggesting he might pursue another enforcement action.

Household also faces a lawsuit filed in February in Alameda County by the Assn. of Community Groups for Reform Now. The community group -- known as ACORN -- accused Household of systematically cheating thousands of California borrowers, which the company denied.

A New York-based consumer group, Inner City Press/Community on the Move, said Thursday that it will urge federal regulators to block the transaction on the grounds Household overcharged some borrowers.

HSBC's stock fell 3.9% in London trading Thursday, and slid $1.85 to $54.20 on the New York Stock Exchange.

Investors will receive 2.68 ordinary HSBC shares, or 0.53 American depositary share, for each Household share they own -- or about $28.70 a share based on Thursday's closing price for HSBC.

Household shares jumped $5.04, or 22.4%, to $27.50 in NYSE trading. Its bond prices also soared. Even with Thursday's gain, Household's stock is down 52.5% this year.

"This is a cheap, opportunistic acquisition," said analyst David Erskine of Scottish Widows Investment Partnership.

The deal gives Household a stronger, well-capitalized parent with international reach.

"It solves the financing problem, so it's positive," said Matthew Park, an analyst at Thomas Weisel Partners in New York. Analysts said the takeover makes strategic sense as HSBC seeks to diversify its earnings to cope with a slump in the Hong Kong market, where it has its roots, and competition in the British banking scene.

"Over 75% of all return on equity is derived from the United States, so it's where you have to be if you want to be a global player," said Mark Durling of Brewin Dolphin Securities.

Industry analysts have said HSBC, which has a foothold in the Northeast, is interested in acquiring a California bank to increase its presence in the nation's largest banking market.

"It's very logical for them to come to the West Coast," said Edward Carpenter, chairman of Carpenter & Co., an Irvine-based investment bank. "HSBC is in a unique position to facilitate trade between Asian companies and companies on the West Coast."

Pending regulatory approvals, HSBC said it expects to complete the acquisition of Household in the first quarter of 2003.

Times staff writer E. Scott Reckard contributed to this report. Reuters and Bloomberg News were used in compiling this report.

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