Who Steve Hudson, CEO and chairman of Element Financial Corp. (TSX:EFN) of Toronto, which he took public in 2011 to finance the acquisition of receivables in key verticals including commercial and vendor financing, rail, aviation and fleet management. Element has grown to $10.5 billion in assets at the end of its 2014 third quarter, up from just $47 million in assets three years ago.
Involvement The biggest step in Element’s growth was the acquisition of PHH Arval, a North American fleet management business, from PHH Corp., this past June, for US$1.4 billion along with the assumption of several billion dollars of debt—one of the year’s top 10 deals. Dealmaking, of course, is nothing new for Hudson, who created and built leasing giant Newcourt Credit Group before the Russian debt crisis of 1998 forced him to sell. From there, Hudson hit the private equity market, investing in Hair Club for Men and Herbal Magic, before sensing a post-2008 opportunity to reinvent Newcourt.
Listed Before launching Element Financial, you had a successful time in private equity. Why jump back into the finance market?
Steve Hudson I’ve always been a contrarian in my life and there was an opportunity when the market imploded. Companies that were doing finance in Canada—CIT went under, GE Capital got smaller, American banks left and European banks left—so the market was completely open and it was compelling to fill that gap and we had a fair bit of knowledge in it. I was happy in the private equity world… but the opportunity was very significant.
Listed You’ve compared the lure of public markets to heroin. But here you are again. What’s changed?
Steve Hudson If you look at the whole experience at Newcourt over 15 or 16 years, the vast majority was extremely positive…and I walked away with a very good perspective. Coming back, I’ve learned about the power of the capital markets in Canada. [Newcourt] was jointly listed in the U.S. and Canada. We won’t do that again. The Canadian capital markets are powerful and stable and if you lay out a very systematic program of growth, they’ll support you.
Listed So you see big advantages to staying in Canada?
Steve Hudson We bought a $5.5-billion company (PHH Arval) that more than doubled our size and when I talk to my American friends they say, ‘What the heck is a bought deal?’ I tell them a bought deal allowed Element, because of the groundwork we’ve done over the last three years, access to the capital markets in size and made us competitive against U.S. competitors in that bid process. It was pretty powerful and I’d like to keep it as much a secret as I can.
Listed What changes are you seeing in the market as the economy improves? Has opportunity diminished?
Steve Hudson Value gets bid up. We are fortunate we bought most of our building blocks during the recession or soon after. I can see values trading well above what they are today. PHH was a $5.5-billion deal, and we paid 1.45 book, and that’s a reasonable value. You might see those values trading at 2 or 2.5 book, and I don’t think you want to be a buyer then. There is too much goodwill to carry on your balance sheet.
Listed You’ve spoken about the importance of debt-rating agencies for the company going forward. Why is that?
Steve Hudson The access to long-term funding is very important. If you look at a GATX, which is a rail car lessor in one of our silos, it was formed in 1896 and has paid uninterrupted dividends because they paid attention to their balance sheet. Sure, you have to pay attention to earnings per share, but focus on the balance sheet. Access to the term market is a function of your credit rating. So we’ve been methodically building for five years and we’ve finally got one rating agency to come on board. I think you’ll see one, if not two, more.
Listed Element went public through the use of a capital pool structure and a reverse takeover. Why use that structure?
Steve Hudson Great question. No one has asked me that before. You have the option of doing a traditional IPO or an RTO and a guy at Barclays came to me with the RTO idea. There was a lot of sovereign risk in the market at the time and I’d been through that with the Russian ruble. It was funny, I’d tell people the reason we were doing an RTO was because of sovereign currency risk and the people in the room would say, ‘Well, there hasn’t been one of those.’ And I’d think to myself, ‘God, I’m so old.’ They had never been through one and I’d been through one first hand and it cost me a lot of money personally. The RTO took four weeks of market risk out versus a traditional IPO. It probably cost us more in the long run, but it took the market risk off the table.
Interview by Robert Thompson