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David Hargreaves suggests the Australian masters of the ANZ may not have done the venerable New Zealand finance company UDC any favours by snatching at the highest price available for selling it

David Hargreaves suggests the Australian masters of the ANZ may not have done the venerable New Zealand finance company UDC any favours by snatching at the highest price available for selling it

By David Hargreaves

The proposed sale by ANZ of its UDC Finance subsidiary to acquisitive Chinese conglomerate HNA Group is starting to look like a piece of classic 'head office' thinking.

And no, that's definitely not meant to be a compliment.

Grasping an offer of as high as $660 million early this year for UDC - when pre-offer market speculation had put a price tag of only about $550 million on the asset - must have made a lot of sense in ANZ's Melbourne headquarters.

But note for a moment that I'm still - nine months later - describing it as a 'proposed' sale. This is a deal that's developing quite a gestation period.

For sure though, business can move quickly. It may be that even as I'm writing this the various regulatory approvals being sought by HNA's European and Canadian equipment service subsidiary TIP Trailer Services will go through and the deal will proceed.

When the deal was announced in January the aimed timeframe for settlement was in the second half of this year. So, if the deal does happen right now then in reality there's been little or no slippage.

The thing is, it just doesn't look like that at the moment.

Take for example UDC's public communications, fairly sparse as they are. The company issued a product disclosure statement in June 2017, which was then replaced last month by one dated September 13.

Here's what was said (bold emphasis is mine) about the proposed sale to HNA in the June statement:

We, ANZ and HNA Group are working towards completion of the sale of UDC to TIP-HNA. While there is no certainty that the conditions to the sale of UDC will be satisfied, or when they will be satisfied, we currently expect that the sale of UDC to TIP-HNA will complete late in the second half of the 2017 calendar year.

Here's what was said (again the bold emphasis is mine) in the September statement:

We, ANZ and HNA Group are working towards completion of the sale of UDC to TIP-HNA. However, the sale is subject to certain conditions (including regulatory approvals) and there is no certainty that the conditions to the sale of UDC will be satisfied, or when they will be satisfied.

That's quite different, isn't it?

In the space of three months the tone has shifted pretty much from one of 'when' the deal is done to 'if' it is done.

That there is some sort of problem with the deal seems to be becoming clear enough. Just what the problem is though is less clear, though the regulatory approvals processes would seem a reasonable place to start.

No indication on decisions

Overseas Investment Office approval was sought for the deal in March. The process is apparently still ongoing with no indication of when there will be a decision. Likewise approval has also been sought for the change of ownership for UDC from the Reserve Bank. Ditto, no decision yet.

TIP Trailer Services President Bob Fast told in May that he expected he may hear news of the OIO application by June, while he also talked of UDC being separated from ANZ in September-October. Well, we are not at the end of October yet, but a fair few things would have to happen between now and the end of the month. And bearing in mind that Fast's now saying there isn't a timeframe for the deal to be consummated.

As to what could be the problem with HNA getting regulatory approval, well, it's speculation - but I would suspect difficulty answering in a straight-forward manner the fairly simple question, "who owns HNA?" might feature in the thinking.

When's Gareth Vaughan interviewed Bob Fast in May he directly asked him who owned HNA - and this was the answer:

'A number of private shareholders'

"So, HNA is owned by a number of private shareholders. There's a group...there are a couple of foundations in there, a couple of different funds, right? So it's a pretty broad based ownership for the company."

The worldwide speculation about HNA, its ownership, and where it gets its funding, has been constant as the group has gone on a massive spending and acquisition spree. I include again here a couple of recent examples of this speculation:

 The Wall Street Journal reported late last month that HNA is rethinking whether to seek tax-exempt status for a New York foundation, Hainan Cihang Charity Foundation Inc, that the company said would become its biggest shareholder, raising questions about HNA's plans for the charity. And subsequent to that Reuters reported Bharat Bhise, an Indian-American dealmaker who held a 30% HNA stake for a decade prior to transferring it into the charity, said he kept the shares as an "accommodation" to the company and received no compensation for doing so.

Now, you can argue that as businesses get bigger and more complex then the ownership gets more complicated. But actually it doesn't need to. New Zealand's richest man Graeme Hart is in the minnow status next to HNA. But he owns substantial global packaging businesses all the same. And do you know what? If you want to track various of the names associated with Hart, such as Rank and Reynolds back to the source, you will find companies with small shareholdings held entirely in his own name by one Graeme Richard Hart. Big does not have to mean opaque.

'I hope the deal succeeds'

This is not about clobbering HNA. I genuinely hope if this deal does succeed that HNA-TIP can make a success of running UDC, which does fill a valuable financing role in industry and has of course for many, many years.

I do wonder, however, whether harm has already been done to UDC.

The news that ANZ's 'head office' was looking to offload UDC first emerged early last year. The problem always with allowing the fact you might be keen to sell something to get out is that you then almost have to go ahead with a sale. If ANZ had eventually come out with a statement last year to say that it would not be selling UDC then the assumption would have been that the price was not right. And that efforts to sell the business would continue later. Uncertainty would reign over UDC.

In the event that the ANZ people in Melbourne see this column, and I guess it would be a fair bet that they do, I should stress that I personally have not heard a peep of dissension from either UDC or ANZ NZ regarding this deal. Which suggests there's some pretty good loyal people in these NZ businesses. The fact is, if I was working for either ANZ in this country or UDC I would be reasonably brassed off.

UDC's been boxing on with this hanging over its head for over a year and a half now at least.

A strange position

And this of course is a company that raises financing from the public. It's now in the strange position of attempting still to raise money by issuing secured debentures, whilst having an agreement with existing debenture holders that it might repay that money at any time - if and when this HNA deal does materialise.

There's no risk of course for debenture holders because as of today UDC is 100% owned by and backed by ANZ.

But an interesting corollary to all this is that at a time when ANZ is seeking ultimate separation from UDC it is actually having to get closer.

Before the talk of sale emerged in earnest, UDC's financial accounts for the year to September 2015 showed that it had $1.736 billion of funding from the public in secured investments, while it had used $280 million of its credit facility with ANZ.

A year later, as at September 2016, the secured investments had shrunk to $1.592 billion, while $595 million of credit had been used from the ANZ.

UDC has yet to report financial results for this year yet and it's not quite comparing apples with apples, but the ANZ's most recent disclosure statement for the period ended June showed that UDC's secured investments had shrunk rather more quickly, now down to just $1.121 billion, while UDC's latest product disclosure statement says that as at the end of May the amount owing to ANZ was some $1.163 billion.

There's a trend there that would take some reversing if for any reason the deal with HNA didn't materialise.

Seemed like a good idea at the time

So, what seemed like a great idea in 'head office' might not turn out to have been so good if the HNA deal doesn't get over the line. What would be the price for a sale now if ANZ has to renegotiate? And bear in mind that having announced a sale ANZ could hardly now turn around and say it won't sell UDC. It could get very sticky.

The question I would ask is, would the ANZ in New Zealand have made this decision, knowing the local market and the place in that market UDC has? I suspect not.

The head office folk in Melbourne were running a risk that a company (HNA) with no New Zealand presence and with plenty of questions being asked about it globally would be rubber-stamped to take control of UDC.

How well thought through were the possible consequences for both ANZ and UDC across the ditch?

The price undoubtedly looked great. But if you want to talk about a natural owner for UDC, well what about Heartland Bank - which was interested. Yes, it might have struggled to structure a deal and it almost certainly couldn't have put up the sort of figures HNA did. But Heartland ownership of UDC would undoubtedly have been warmly welcomed.

As owner of a business in UDC that's been around for nearly 80 years, ANZ arguably had some sort of obligation to provide it with a good future. I think you can question whether right now that's what's happening.

Yes, the price looked nice. But it's not always 'right' to just flick a business in the public eye to the biggest bidder.

ANZ in New Zealand and UDC may yet pay the price for this 'head office'-driven deal.

*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.

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