UK subprime M&A scrap risks bloody outcome
By Aimee Donnellan
(The author is a Reuters Breakingviews columnist.)
LONDON, May 10 (Reuters Breakingviews) - The UK subprime takeover scrap is getting bloody. Doorstep lender Non-Standard Finance's 1.1 billion pound ($1.4 billion) all-share takeover of bigger peer Provident Financial is meeting resistance. That could leave the acquirer facing a lengthy delay, or stuck with pesky holdouts. Finance can be a tricky arena for aggressive dealmaking.
Competition is one problem. The merger would unite two big players in the niche market for doorstep lending. And, as the offer expires next week, shareholders will need to accept it before they know what remedies the UK Competition and Markets Authority might impose. Since Provident shareholders would own 88% of the group, they would bear most of the cost of any hurried disposals.
Capital is another issue. The Bank of England requires Provident to hold a common equity Tier 1 capital buffer in excess of 25%. Provident reckons NSF is undercapitalised, and any merger would leave the combined group below the minimum level. Analysts at Autonomous disagree, but still reckon that the deal would leave the merged entity with just a 28 million pound buffer. That would be dangerous if the UK economy weakens. An extra risk comes from the UK Financial Conduct Authority, which is investigating the guarantor loans sector, in which NSF is active.
If other shareholders agree with Schroders, then NSF is in a bind. With the backing of Invesco, Marathon and Woodford, it will be able to control Provident. But it needs 75% approval to delist it, or 90% to squeeze out the minorities. If it can't even reach the lower level, it won't be able to combine the companies, or extract cost savings from the deal. It would also have to deal with difficult holdout investors, who may demand better terms. It can simply accept any tendered shares, and keep the offer open in the hope that investors come round as the regulatory clouds clear. Van Kuffeler may need to get used to months of uncertainty.
- UK lender Provident Financial's shareholder Schroders said on May 7 it would not accept Non-Standard Finance's 1.1 billion pound ($1.4 billion) all-share offer for the group. Schroders holds a 14.6% stake in Provident.
- NSF, led by former Provident boss John van Kuffeler, already has the backing of three shareholders owning just over 51% of Provident's shares. Those three shareholders, Invesco Asset Management, Woodford Investment Management and Marathon Asset Management, also own stakes in NSF.
- Schroders said it was worried that the timing of the offer would leave Provident shareholders exposed to any remedies imposed by the UK competition authorities. Schroders also said that NSF "faces a number of operational and regulatory challenges".
- "We do not believe the shareholders of PFG who are also collectively majority shareholders in NSF (namely Woodford, Invesco and Marathon) should be seeking to impose the challenges of the latter company on the former," Schroders said.
- Shareholders have until May 15 to accept the offer.