Synchrony Financial, which bought a pet insurance business ahead of a pandemic-driven boom in the sector, is now selling the unit for a substantial profit.
The Stamford, Connecticut-based credit card issuer said the sale of its Pets Best subsidiary would result in an after-tax gain of $750 million.
Synchrony, whose CareCredit card offers financing for health care and pet needs, is keeping its toes in the pet insurance business by taking an equity stake in a subsidiary of the company buying Pets Best. The deal should help Synchrony expand the reach of CareCredit by allowing it to cross-sell the card to more pet owners.
The price of the deal was not disclosed, but Synchrony said it would receive a mix of cash and stock in Independence Pet Holdings, which owns several insurance brands. IPH is a subsidiary of Poodle Holdings, which is buying Pets Best.
As IPH is one of the largest pet insurers in the country, Synchrony expects to have access to a large pool of potential customers for its CareCredit product.
The transaction is subject to regulatory approval and other closing conditions. Synchrony expects it to close in the first quarter of next year.
A Synchrony spokesman said on Tuesday that the deal was “a win for everyone, including pet parents across the country”.
“Synchrony expands its leadership in the pet industry through its ownership of IPH and gains new opportunities for our CareCredit business,” the company spokesperson said. “We are excited about what is possible through our partnership to achieve long-term growth for Synchrony, Pets Best and IPH.”
Synchrony bought Pets Best for an undisclosed price in March 2019, a year before the COVID-19 pandemic caused a spike in pet adoptions and led to more business for Pets Best. According to market research firm IBISWorld, revenues in the US pet insurance industry will grow by 19% between 2018 and 2023.
After the deal was announced late Monday, Synchrony’s share price jumped more than 5% on Tuesday.
John Hecht, an analyst at Jefferies, wrote in a note to clients that the deal provides a near-term boost to Synchrony’s earnings while keeping the company in the fast-growing pet spending and insurance businesses.
The sale will boost Synchrony’s capital levels at a time when regulators are poised to raise capital requirements for banks with more than $100 billion in assets, Hecht noted. Synchrony has about $113 billion in assets.
Higher capital levels could also mean more share buybacks or “additional strategic M&A opportunities similar to the original Pets Best Insurance investment, which proved highly accretive” to Synchrony’s financials, Hecht wrote.
RBC Capital Markets analyst Jon Arfstrom was also positive on the deal, writing in a note to clients that the sale “adds to the company’s already strong excess capital position.
Synchrony’s capital cushion puts it in a “strong position to weather a more challenging consumer environment,” Arfstrom wrote. Synchrony and other credit card issuers have seen more borrowers default on their payments and have been forced to write off more loans to customers who can’t repay them.
Synchrony has built up reserves to handle higher losses, which should help the company continue to grow its loan portfolio during the usual holiday spending spree, Arfstrom wrote.
“We continue to believe the company is well-positioned for the near- and medium-term and applaud management’s efforts to bolster capital flexibility with this deal,” Arfstrom wrote.
