LendingClub's Options: More Buybacks, Even a Deal?

Potential suitors include rivals such as SoFi and Prosper, as well as large banks.

It's been a busy week for LendingClub's seven directors. 

On Monday, they scrapped future guidance and ousted founder and CEO Renaud Laplanche after discovering flaws in the company's lending practices and issues with Laplanche's lack of disclosure about a personal investment. Since then, the likes of Jefferies Group and Goldman Sachs Group have hit pause on buying LendingClub loans, a move that puts into question the lending platform's ability to originate and sell loans (its main source of revenue) and caused a further decline in its shares.  

By Wednesday, LendingClub had touched an all-time intraday low of $3.95, for a market cap of $1.5 billion. That represents a decline of more than 40 percent since this time last week and is a world away from the $10.3 billion peak reached shortly after the company's December 2014 initial public offering.

What Now?

LendingClub's shares have tumbled, and are now worth a fraction of their December 2014 high

Source: Bloomberg

So what should be next on the board's agenda? One way directors could stem the bleeding would be to expand their share buyback program, funded by a cash pile that sat at $623.5 million as of Dec. 31. Such a move would further reduce the number of LendingClub shares on issue, meaning that if the board decided a sale was the best option for the company, potential suitors would be compelled into paying a higher premium for its equity. 

LendingClub isn't overly cheap at its current valuation of roughly 14 times estimated 2017 earnings (down from 38 times at the beginning of this year), but a sale is in the realm of possibility. 

Potential suitors include rivals such as Prosper Marketplace and Social Finance (known as SoFi), which both have experienced CEOs that could fill the void left by Laplanche and may be lured by both synergies and scale. Notably, the duo have private market valuations well north of LendingClub's current worth at $1.9 billion and $4 billion, respectively.

Other interested buyers could include banks such as JPMorgan Chase or Wells Fargo, which trade at roughly 9.7 and 11.2 times 2017 earnings, respectively, according to data compiled by Bloomberg. Large banks may deem it worthwhile to snag LendingClub for its ability to originate loans at a time when many banks are striving to drive loan growth, and as physical branches are being disintermediated by online alternatives. 

Origination Station

LendingClub has originated and sold loans worth $18.7 billion since its inception, but risks slower growth

Source: Bloomberg

Discover Financial Services -- which competes against LendingClub for consumer loans -- might also consider taking a look. But seeing as it's doing just fine (its personal and student loan portfolios grew 9 percent and 15 percent in the first quarter over the prior year, respectively), a deal isn't as compelling. 

At the end of the day, LendingClub's directors may believe the company's best path is going it alone. Even then, spending more cash on buybacks can't hurt. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Gillian Tan in New York at gtan129@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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