Faced with stock buy-back window, Rent-A-Center sees high yield better than bank debt

By Paul A. Harris

St. Louis, Mo., Dec. 6 - Rent-A-Center, Inc.'s $100 million add-on note offering will position the company to exercise a call on $34.7 million of stock held by its former chief executive officer, a transaction on which the clock is ticking.

And in the current market environment, the Plano, Texas rent-to-own operator said high yield offers a much more appealing source of finance than bank borrowing.

Rent-A-Center began the roadshow Thursday for the offering (B1/B existing), which will increase the size of its 11% senior subordinated notes due Aug. 15, 2008, and is set to price the deal Wednesday Dec. 12 via bookrunner J.P. Morgan.

Rent-A-Center's vice president of finance and director of investor relations Peter Bates told Prospect News Thursday that there is only a narrow window for the stock buyback.

"The arrangement we had with the recently-departed CEO, Ernie Talley, was that we had a call option to buy back his stock at $20," Bates said.

"That call option expires on Feb. 5. So we are trying to position ourselves to take advantage of that option because it's an accretive transaction to the company.

"And given the current financing market, the bank markets are definitely tighter than the high yield market. This deal seemed like a more reasonable alternative. The bank market would have exacted too high a price from what we were willing to do with our existing bank debt."

In addition to the equity buyback, proceeds from the deal will fund the settlement of a gender discrimination suit, Bates said, adding that the settlement is for $12.5 million, but attorneys fees will bring the total to approximately $15 million.

Two additional gender discrimination suits are pending, Bates said.

Proceed from the new Rent-A-Center paper will also be used to repay $30 million of senior bank debt.

The remaining proceeds, Bates said, will go for general corporate purposes, including inventory purchases and acquisitions.

Bates spoke with Prospect News on the telephone from Chicago, where he was roadshowing the Rent-A-Center deal. He said that Chicago contained some of the markets into which the company might expand.

"We're in every region of the country, but we're not in every market," he said. "We're in Chicago but we'd like to open more stores in Chicago, or acquire a few more stores in the Chicago area, definitely.

"We know there's also a lot of opportunities on the West Coast, up and down California, and even into Portland," Bates added. "And there are a lot of opportunities in the Northeast.

"It's a matter of doing the demographic studies to find the right pockets where we feel there's underpenetration. And the map shows there's a lot of underpenetration."

With regard to operating the business in a recession, Bates said "We define our business as 'recession-resilient,' not counter to the economy, but just resilient to the economy.

"Internally we don't feel recession is bad," he added. "If the economy is doing poorly we can certainly operate in that environment. It's not going to hurt us. We want to be known as operating independent of the economy. And I think our top-line results reflect that."

Bates said that same-store sales for the second quarter of 2001 were 8.7% higher, versus 12%-13%, for the second quarter of 2000; quarter three of 2001 saw sales up 4.5%, versus 14% in 2000. Guidance for quarter four, he said, is for an increase of 6% to 7%, versus 9% in 2000.

Moody's Investors Service today issued its B1 rating to the new Rent-A-Center deal, and changed the outlook to negative from stable.

Marie Menendez, vice president and senior credit officer of Moody's, told Prospect News Thursday that although Rent-A-Center was indeed in business during the recession of 1990, the competitive landscape of the rent-to-own industry was considerably different than that of today.

"Like a lot of other businesses, the dynamics of the competitive situation of the rent-to-own have changed really significantly," Menendez said. "This is an industry that went through a tremendous amount of consolidation through the 1990s.

"For example, Rent-A-Center, the company on which we recently published the rating, reports that they believe that they have close to a 30% market share. They more than doubled their size just in the last couple of years. Basically, they and the other major competitors in this market have all grown through acquisition and consolidation.

"So if you went back more than 10 years you probably wouldn't be able to see the kind of business trends that we see now. You had companies that weren't that large, that didn't have the advertising budgets, didn't have the presence, didn't have the buying power with vendors that presumably the larger companies have now."

Menendez said that Moody's believes Rent-A-Center is poised to operate in a growing economy, where its customers' salaries might translate into extra rent-to-own agreements. In a recession, she said, it is unclear that those extras will come into play.

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