In a deal that will rock the fintech space Enova announced this afternoon that they are acquiring OnDeck for $90 million. OnDeck has been struggling since the onset of the pandemic, to say the least, as small businesses across the country face unprecedented stress.
OnDeck reported in their Q1 earnings call in April that 45% of their loan book was in some stage of delinquency as they reported a $59 million net loss. They reported Q2 earnings earlier this afternoon and they somehow managed to eke out a $2.2 million profit on originations that were down 89% from the prior quarter, as they suspended new lending.
OnDeck CEO Noah Breslow was on the Enova earnings call this afternoon and he made the comment that the nadir for their loan book was in April and things have improved considerably since then as they economy has opened up. They have reduced their provision for credit losses as the future started to look better.
Anyway, back to Enova. They are a publicly traded company, primarily focused on consumer loans, that was spun out from Cash America in 2014. Incidentally, one of their brands, short term lender CashNetUSA, was actually started by Al Goldstein (co-founder of Avant) back in 2004, he sold to Cash America two years later. Another brand is NetCredit which is more of a near prime consumer lender (I interviewed the head of NetCredit on the podcast back in 2018).
While Enova has been focused on consumer lending with a range of products they have started making inroads in small business lending. They have two small business brands: Headway Capital and The Business Backer. While they started Headway Capital in-house Enova actually acquired Business Backer in 2015 so they have some history with acquisitions. Combined, the small business lending operations at Enova make up just 15% of their loan book. After the acquisition of OnDeck that number will rise to 60%. That gives you some idea of how big a deal this is for Enova.
While Enova has scaled back lending considerably since the start of pandemic they are in a strong position financially. In their Q2 financials released this afternoon they show a net profit of $48 million for Q2 on revenue of $259 million despite the slowdown and they have $321 million of cash on hand.
According to the press release announcing the acquisition the $90 million transaction values OnDeck at $1.38 per share which is a 90% premium on the closing price of $0.73 from July 27. The deal includes $8 million in cash and each share of OnDeck will be worth 0.092 shares of Enova. The transaction has been unanimously approved by both boards and is expected to close later this year.
I have to admit I didn’t have Enova on my OnDeck potential acquirer bingo card. While Enova is a strong company they are best known for their short term consumer loans and so I didn’t really think they were a fit. I expected the acquirer would be another small business lender, a regional bank, a large community bank, or possibly even a top 10 bank like PNC (who is an OnDeck/ODX client).
I listened to the entire Enova earnings call this afternoon and it is clear they are in a strong financial position right now with a lot of cash on hand. I would call this an opportunistic deal which transforms Enova from a tiny player to a major force in small business lending.
In my opinion, Noah and the board did the right thing and found a home for OnDeck, their employees and their shareholders. While this is likely not what anyone envisioned in their wildest dreams at the start of the year it was important that the OnDeck business survive and be in a position to thrive again. This deal provides that possibility.
The fintech landscape is changing before our eyes as I imagine this will not be the last pandemic-induced acquisition we see this year.