It should be the best of times for Heller Financial Inc., the Chicago lending specialist that provides money for midsize businesses when commercial banks shy away.
For the past 82 years, Heller’s fortunes have looked up when the economy has turned down. And this year, true to form, revenues are shooting higher as a slew of companies, including some stalwarts of Chicago commerce, find their creditworthiness slipping.
Yet Heller has a problem it didn’t face in previous downturns–a problem that could prompt its 52 percent equity owner, Fuji Bank of Japan, to consider a divestiture.
These days, Heller is paying more than virtually all its major competitors to fund its key lending operation.
The problem is a function of scale: Because of rampant consolidation and the recent bankruptcy of competitor Finova Group Inc., Heller now competes against the likes of GE Capital Corp. and other units of giant multinationals. Those firms are so big they can obtain funding from the markets for less, and thus show greater profits.
That has Wall Street experts predicting a deal: If not General Electric Co., perhaps Citigroup Inc., Wells Fargo & Co., or maybe FleetBoston Financial Corp.
Any one of those giants would give Heller the wherewithal to play on an even field, said Reilly Tierney, a finance company analyst at Fox-Pitt, Kelton in New York. As he bluntly states it: “They should sell the company to somebody with a bigger balance sheet.”
For its part, though, Heller management says no such sale is in the offing.
Sure, takeover rumors–which began when Fuji made Heller shares available publicly in 1998–have escalated recently, said Lauralee Martin, Heller’s chief financial officer.
But the company remains one of Fuji’s best-performing units, she said. And up to now Heller has managed to make up the profit margin it loses from its funding-cost disadvantage through lucrative side businesses, she said. “So far, we’ve been making up for it with other performance.”
Future unclear
Still, broader issues could play a role in determining Heller’s future. Financial troubles recently forced Fuji into an elaborate merger with two other suffering Japanese banks. One of those banks recently sold its 27 percent stake in CIT Group Inc., a Heller competitor that was acquired by Tyco International.
While Heller’s solid business is an important prop to Fuji, the unit also could fetch a bundle of needed capital. The stock is trading near its 52-week high, closing Friday at $37.90. “You’d have to pay real money for Heller,” noted Moshe Orenbuch, a finance industry analyst at Credit Suisse First Boston in New York.
In addition, with General Electric Co.’s acquisition of Honeywell International Inc. in grave doubt, the U.S. giant is expected to lean more heavily for earnings on its massive finance unit, GE Capital. And Heller would be an excellent fit there, analysts agree.
Through it all, Heller continues pursuing its low-profile but lucrative business, as it has since 1919.
At times, Heller’s projects have been glamorous. It underwrote movies, including “The African Queen” and “High Noon,” and financed the original “Lassie” television series.
It also has backed big names in Corporate America: Sunglass Hut, Banana Boat, Harley-Davidson and the old WorldCom–sometimes when they had nowhere else to turn.
But that rich heritage is not what dazzles Chairman and Chief Executive Richard Almeida about his company.
Almeida, a clean-cut, amiable investment banker who became CEO in 1995, talks more about the way Heller survived its own series of stumbles beginning in the late 1970s.
“Heller was weakening because of competitive pressure,” Almeida said.
Banks and others were suddenly interested in commercial finance, a business they previously avoided. The new competition pushed Heller dangerously close to bankruptcy and ended with Fuji Bank’s agreement to acquire the firm in 1983.
Fuji pumped money into Heller, whose management began to focus on two of the company’s most profitable businesses–leveraged finance and real estate finance–to the exclusion of other products.
More Top Picks Best Weighted Neck Wraps For Sensory Needs
Besides limiting its business mix, Heller also provided clients with more money than it would have before. That spelled serious trouble in the late ’80s, when the economy foundered and loans began to go sour nationwide.
It was a time when Heller ordinarily would have stepped in to finance companies being denied bank credit.
Instead, Heller struggled and finally emerged with a new strategy: Go back to a diverse set of products, broaden its reach across industries and stay away from large bets.
The company was strong enough by 1998 to return to the New York Stock Exchange with an initial public offering that generated more than $1 billion.
A healthy expansion
Almeida is particularly proud of Heller’s expansion into the health-care industry, whose small and midsize players crave attention from lenders.
Health-care revenues accounted for 8.5 percent of Heller’s total revenues in 2000, up from 1 percent in 1998.
“The government changed the reimbursement rules a few years ago, which created turmoil for health-care providers. Banks wanted nothing to do with it,” Almeida said. “We took the counterintuitive approach.”
Heller usually does.
On New Year’s Eve 1985, Harley-Davidson Inc. stood on the brink of bankruptcy because no banks or other lenders would step in to save it.
Harley was in the midst of a turnaround, but results were not strong yet, and the company’s biggest creditor–Citibank–had warned a year earlier that it wanted out.
In the end, no one but Heller was interested in buying out Citibank’s stake of more than $25 million.
Heller liked Harley’s management and its restructuring plan. But a big factor that tipped the scales in Harley’s favor was its brand strength.
“Our view was that any company where customers tattoo the name on their bodies is not a company that will die,” said Michael Litwin, Heller’s chief credit and risk officer.
It was a good bet. In 1986, Harley held an initial public offering and, like many of Heller’s clients, grew so large that Heller could no longer handle its financing needs.
Also like a lot of Heller clients, Harley paid more for financing there than it would have elsewhere.
“We’d run out of time. We thought we were paying too much, but it was better than Chapter 11,” said Harley Chairman and Chief Executive Jeff Bleustein.
“They certainly played a very important part in our history by being there at a very, very critical time for Harley-Davidson.”