PGC to hold 71% of 'Heartland Bank' with Jan 1 launch date targeted

PGC to hold 71% of 'Heartland Bank' with Jan 1 launch date targeted

The boards of the three so-called "Heartland Bank" merger partners have now formerly committed to the deal with Pyne Gould Corporation (PGC) set to hold 71% of the combined bank and financial services group when it's launched on January 1.

(Update adds link to announcement, including graphs and charts).

PGC, which is contributing Marac Finance and Marac Insurance, the Canterbury Building Society (CBS) and Southern Cross Building Society (SCBS), say they have built up about NZ$300 million of cash and liquid assets to ensure "significant liquidity" for the merged group. In addition to this they will supplement funding from CBS, SCBS and MARAC’s depositor and debenture investor bases, are negotiating with banks as they seek standby banking facilities and securitisation facilities, and will consider, "in time," listing retail bonds on the NZX debt market.

Ownership of the merged entity will be PGC 71%, CBS 14.5% and SCBS 14.5%. The three said PGC would stay as a "discrete entity" with a single holding in the merged group whereas the individual shareholders of CBS and SCBS will own shares in their own right.

PGC announced early in June plans to merge Marac with the two building societies, enabling them to create greater scale and tap a bigger retail deposit funding base as they seek an investment grade credit rating and bank licence from the Reserve Bank. The plans envisage a NZX-listed "Heartland Bank" that would aim to double its NZ$2.3 billion asset base within five years through growing family, small business and agricultural lending.

The proposal calls for CBS and SCBS to be amalgamated and then acquire Marac. The group would have about 360 staff and 70 customer outlets. Last month the three said the Heartland Bank would be established through an NZX listed non-operating holding company, which they now say will be known as Building Society Holdings Limited. It will oversee the operating company, initially known as Combined Building Society, which will seek the banking licence which the three hope to obtain by next July. They will also seek an investment grade credit rating from Standard & Poor's, something none of Marac, CBS or SCBS currently have.

A binding Merger Implementation Agreement has now been signed. Subject to regulatory and stakeholder approvals and satisfaction of other conditions, the target date for the merger taking effect is January 1, 2011. The merged group will seek an NZX listing targeting a listing date for early February.

“This is a significant step forward," said Bruce Irvine, the chairman of the Establishment Board overseeing the merger.

"After extensive due diligence, evaluation and independent analysis we are firmly of the view that the merger is compelling and will be beneficial to all parties. As such, all four boards (including Marac) will be unanimous in recommending the merger proposal to their respective stakeholders.”

Implementing the merger will involve several steps under the Building Societies Act and the Companies Act, with an application to be lodged with the High Court for initial orders relating to a Scheme of Arrangement. Meetings of members, shareholders and investors are expected to take place in November where votes on resolutions to enable the Scheme of Arrangement and other implementation processes will be held.

Irvine said the group aimed to establish a nationwide presence focused on leveraging existing "legacy" markets in Canterbury, Auckland, Waikato and Bay of Plenty. It would focus on lending activity in niche sectors including small-to-medium businesses, rural businesses and New Zealand individuals and families. The group will adopt a "customer first delivery approach," offering tailored products and services to customers, target a broader shareholder base and capital structure to facilitate growth.

Irvine said the merger partners had concluded merging was compelling because doing so would provide;

- Increased scale and a platform for accelerated growth via a nationwide distribution network and increased market presence and credibility.

 - A diversified asset portfolio and depositor base.

- A better case for obtaining an investment grade credit rating and banking licence.

- Access to alternative sources of funding and greater liquidity.

- The ability, over time, to realign their combined asset portfolios, driving consistent profitability and shareholder returns creating the prospect of being able to pay regular dividends.

- A sharemarket listing, which should lead to greater investor interest, greater liquidity and inclusion in the NZX50 index.

"The outlook for a merged CBS, SCBS and MARAC would be substantially better than that for any of the parties on a standalone basis, particularly given the changing economic, regulatory and competitive landscape," said Irvine.

“It is our aspiration to become a bank,” he said. “We have been told by shareholders, businesses and community leaders that they want this merger to happen as soon as possible.”

The merged entity will have its head office in Christchurch, where it will play its part in helping the region recover from the September 4 earthquake, he added. About 28% of the combined group's loan book and 39% of the deposit base are in Canterbury.

Existing brands will continue to be used after the merger takes effect.

See the three companies statement on implementation below and see the full announcement here:

The implementation of the merger will involve a number of processes under the Building Societies Act and the Companies Act. An application will be made shortly to the High Court for initial orders in respect of a Scheme of Arrangement. That will be followed in November by meetings of members, shareholders and investors in the four entities to pass the necessary resolutions to enable the Scheme of Arrangement and other implementation processes to be put into effect. If the voting stakeholders in the four entities agree to implement the merger the new entity will comprise a non-operating company, Building Society Holdings Limited (“Merged Group”), which will seek listing on NZX.

The operating businesses of CBS, SCBS, MARAC and MARAC Insurance will be held in operating subsidiaries of Merged Group.

The merger share proportions will be PGC 71%, CBS 14.5% and SCBS 14.5%. PGC will remain a discrete entity with a single holding in the merged entity whereas the individual shareholders of CBS and SCBS will own shares in their own right.

The board of the Merged Group will comprise up to nine directors; five (one of whom will be chairman) nominated by PGC; up to two nominated by SCBS; and up to two nominated by CBS. A minimum of three directors are required to be Independent Directors. The integration of the businesses will be phased in over time so as to ensure there will be no disruption to the merging entities’ front line operations. Upon the merger taking effect it is intended that existing brands will continue to be used.

The integration process will be overseen by the new board and a project team. The agreement represents the first stage of the Merged Group’s operating business seeking a banking licence.

Additional comments from the respective chairs: Bruce Irvine, PGC, Gary Leech, CBS and Geoff Ricketts, SCBS: “We firmly believe the merger is a compelling value enhancing proposition for members and shareholders that would not otherwise be available to each of us on a standalone basis.”

“We believe changes in the financial sector have created a strong appetite for a New Zealand listed banking group from our respective members, shareholders and customers. We also think there is a niche that we can fill in our target market which is currently under serviced – that being the banking market for SMEs, rural businesses and NZ individuals and families.”

“The merger brings scale to our operations, with combined assets of approximately $2.3b. This provides a platform for accelerated growth via a nationwide distribution network, increased market presence and credibility. Increased scale is also likely to provide access to more diverse sources of debt funding and greater equity funding capacity (via an NZX listing).”

“Moreover, we believe the benefits of scale, the ability to drive asset growth and potential funding cost improvements will enhance profitability and lead to superior shareholder returns.”

“The landscape for finance companies and savings institutions is changing in the wake of the global financial crisis and as new regulations are implemented. The merged entity will not only comply with all applicable regulations but will be well placed to take advantage of expansion opportunities.

We strongly believe that this is the best way forward for our respective businesses. Each of us intends doing all we can to obtain the required consents to make this happen and to implement the merger.” It is intended that full details of the merger proposal will be sent to all relevant stakeholders in early November. A summary of the conditions contained in the Merger Implementation Agreement, and other related information, have been filed with the NZX.

The key advisers to the four entities are First NZ Capital, PricewaterhouseCoopers, Deloitte and Chapman Tripp.

NB: 1. None of CBS, SCBS, PGC and MARAC is a registered bank, and any merged entity will not be a registered bank until it is registered as such under the Reserve Bank of New Zealand Act 1989.

2. It is intended that application will be made to NZX Limited for permission to list the shares to be issued under the Merger on the NZSX, although the shares have not been approved for trading on a securities market operated by a registered exchange (and no application for such listing has been made) as at the date of this announcement. NZX Limited accepts no responsibility for any statement in this announcement. NZX Limited is a registered exchange regulated under the Securities Markets Act 1988.

3. Building Society Holdings Limited and Combined Building Society are working titles pending a formal branding process.

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