LONDON - The Bank of England has thrown a wrench into the future plans of M&A bankers. Subprime lender Non-Standard Finance scrapped its 1.1 billion pound bid for rival Provident Financial after the UK’s Prudential Regulation Authority took a harsher-than-expected view on the combination’s capital. It’s a victory for prudence, at the expense of clarity.
John van Kuffeler’s three-and-a-half month quest to buy his old shop unravelled in a matter of days. The chief executive of Non-Standard Finance started out strong with the support of major shareholders Woodford Investment Management, Invesco and Marathon Asset Management, who between them held 50.01% of the group. That, along with Provident’s three recent profit warnings, gave him the confidence to launch an offer for the remaining shares despite the opposition of the target’s board.
Those remaining shareholders have proven a bigger obstacle. Some, such as Schroders, publicly rejected the offer, questioning the logic of merging the groups, and NSF’s business model, which includes controversial high interest guarantor loans. Only a further 3% of Provident’s shareholders accepted NSFs offer.
Van Kuffeler could have gone ahead anyway. The level of acceptances would not have allowed him to delist Provident, but he could have controlled the board. And over time, some of the holdouts would probably have accepted the offer. Yet the Prudential Regulation Authority scuppered it, by implying just before the final acceptance date that NSF would have to consolidate Provident’s assets, but deduct the minority shareholders’ capital if it went ahead, effectively assuming that the holdouts would continue to resist. That would blow a hole in NSF’s balance sheet.
The intervention may not have just caught NSF off guard. Neither sell-side analysts nor Provident’s bankers had publicly raised the question of how minorities’ capital would be treated. There’s plenty about the deal the PRA might not have liked. Analysts at Autonomous reckon that the combined group would have had a capital buffer of just 28 million pounds, before taking into account minority shareholders. The recent decision of Woodford Investment Management to suspend its flagship fund might have complicated a capital raise, had it been necessary. Still, the PRA’s tough line will make it harder for M&A bankers to pitch hostile deals, and for investors to appraise them.
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- British subprime lender Non-Standard Finance on June 4 dropped its 1.1 billion pound hostile bid for rival Provident Financial, saying that the deal risked leaving the group with inadequate capital.
- Non-Standard Finance said that the “regulatory condition” required for its offer to proceed would not have been met because of the low take-up by Provident Financial shareholders for the offer. As only 53.5% of Provident Financial shareholders had accepted the offer, the remaining minorities would have been deducted from the capital of the enlarged Non-Standard Finance group, which “would not have sufficient regulatory capital on a consolidated basis”, Non-Standard Finance said.
- The decision to ditch the deal, which NSF said had followed talks with the regulator, was in the best interests of Provident’s shareholders, Provident said in a statement on June 5.
- The UK Competition and Markets Authority had also raised questions over the proposed deal in May, saying that it was considering whether a merger of the two would result in a substantial lessening of competition.
- Shares in Provident Financial were up 9.3% at 487.3 pence by 0741 GMT on June 5. Shares in NSF were down 2.8% at 45.7 pence by 0741 GMT.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
(Editing by Neil Unmack and Bob Cervi)
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