Commercial Credit Agrees to Purchase Primerica for $1.7 Billion in Cash, Stock

Commercial Credit Group has signed a final agreement to acquire the much larger Primerica Corp. in a cash and stock deal worth $1.7 billion, the two diversified financial services companies said Monday.

Commercial Credit, run by former American Express President Sanford I. Weill, will pay one share of its stock plus $7 cash for each share of Primerica, the former American Can Co. Primerica has struggled with weak earnings and heavy debt since purchasing the Smith Barney, Harris Upham & Co. brokerage for a high price in May, 1987.

Weill will be chairman and chief executive of the combined concern, which would have annual revenue of more than $5 billion if all current operations were continued. Gerald Tsai Jr., the one-time whiz investment manager who is Primerica’s chief executive, will move out of direct day-to-day operations to be a company director and chairman of the merged concern’s executive committee.

Tsai will be the largest shareholder of the new company, which will take the Primerica name, company officials said. Tsai currently holds 3.78% of Primerica stock.

Broadens Services

Between them, the two companies will offer a wide array of financial services to businesses and consumers. Baltimore-based Commercial Credit offers consumer loans, property, casualty and specialized insurance policies; Primerica, with headquarters in Greenwich, Conn., offers life insurance, investment and mortgage banking, money management and stock brokerage services.

“We’re going to offer people financial services from the time they’re young adults, up through retirement,” F. Gregory Fitz-Gerald, an executive vice president of Commercial Credit, said in an interview.

The merger represents a major step forward toward fulfillment of the ambitions of Weill, a widely admired manager who co-founded a predecessor to the Shearson Lehman Hutton investment firm. In 1986, Weill led a group that purchased the financially weak Commercial Credit unit of computer maker Control Data Corp. and vowed to build it into a diversified financial services firm that would rival American Express.

In the past two years, he has attracted a corps of veteran executives and amassed capital that stirred speculation that he would make a major acquisition of a financial services firm. He has considered several such acquisitions but apparently decided that they were overpriced.

“He has really taken his time deciding what he would buy,” said Anthony Pearce-Batten, an analyst at Legg Mason Wood Walker Inc. in Baltimore. Weill acquired about 20 firms while at Shearson.

Analysts said the $1.7-billion price represented something of a bargain for Weill. The price is about 1.1 times the company’s book value, or net worth; such a sale would ordinarily fetch between 1.3 times to 1.5 times book value, said Joan T. Goodman, an analyst with the Pershing & Co. unit of Donaldson, Lufkin & Jenrette Securities.

As Weill assembled his financial services conglomerate, Tsai was simultaneously trying to forge a similar company from the old American Can. Last year, he sold off Primerica’s remaining manufacturing unit, the canning company, and bought Smith Barney for $750 million.

Considered an audacious stroke at the time, the acquisition looked quite different after the stock market crash depressed the earnings and blighted the prospects for retail brokerage firms. Smith Barney has sharply cut staff since the crash and recently fired five top executives in its public finance department.

Concern Over Recession

Even so, Smith Barney contributed 23% of Primerica’s revenue but only 4% of the company’s earnings in the past six months, analyst Goodman noted. And the acquisition swelled debt service, which rose to more than $80 million for the first six months of this year, compared to $38 million for the corresponding period of 1987.

“They didn’t need this merger, except for the Smith Barney problem,” Goodman said. “They worried about what would happen to the brokerage if there was a recession.”

Primerica’s insurance operations, meanwhile, have been strong. They contributed 68% of the company’s pretax operating earnings, or $169 million, in the first half of this year and 41% of its revenue, or $856 million, Goodman said.

Analysts said Tsai has indicated that he won’t be unhappy to give up responsibility for day-to-day operations. He recently married Cynthia Ekberg, a Kidder, Peabody & Co. stockbroker who works in San Diego and divides her time between that city and New York.

The two companies said they plan to sell Fingerhut Corp., Primerica’s large direct-mail marketing operation. Fingerhut received “several” expressions of interest when it was put up for sale before October’s crash, Fitz-Gerald said.

Primerica’s Dunham unit, which sells athletic wear, may also be put on the block. Other company units, however, “fit in well with the kind of financial services company we have in mind,” Fitz-Gerald said.

In composite New York Stock Exchange trading, Primerica’s stock fell 62.5 cents a share Monday to close at $29.50, while Commercial Credit lost 75 cents to $24.50. Primerica had gained $2.375 a share Friday as takeover rumors raced through Wall Street.

Analysts said Commercial Credit’s stock was hurt today by uncertainty over whether issuing additional stock for the deal will cut earnings per share in the next several quarters.

Commercial Credit last year earned $102 million on revenue of $912 million. Primerica earned $199 million on revenue of $3.7 billion.