By David Hargreaves
Don't be too surprised if there is now a fairly speedy sale by ANZ of its New Zealand finance subsidiary UDC Finance.
In the wake of the disaster, the nearly year-long, slow moving train wreck that was the failed deal to sell UDC to China's HNA, it would have to be assumed that ANZ is keen to make up for lost time - and to wipe some of the lashings of egg yolk from the faces of the high-ups in the head office in Melbourne. (See here for our previous articles on the UDC sale).
I wonder therefore if we will see any formal sales process ditched in favour of ANZ accepting direct approaches from interested parties in order to cut a deal. Remember, there wasn't actually a formal sales process as such the first time around in the end because HNA leapt in ahead of a planned process to negotiate directly and offered a show-stopping $660 million.
One party that was quick to announce interest in UDC at the time it first came up for sale was Heartland Bank. I approached them this week with two questions:
1. Is Heartland still interested in possibly buying UDC?
2. Has Heartland or any of its representatives been in contact with either/or UDC, ANZ or representatives of either of those organisations, or indeed consultants or advisers to those organisations since the collapse of the HNA deal to buy UDC?
A spokesperson gave the following answer: "In response to your questions: As previously signalled to the market, Heartland remains interested in acquiring UDC. However, we are not currently aware of any formal sale process commencing in respect of UDC."
So, Heartland's still interested, but has rather skirted around the issue there of whether Heartland management have made informal inquiries of ANZ. My instinct would be that they have.
Pressed further on that second question, the spokesperson responded with: "Heartland has no further comment beyond our response from yesterday."
'Knew it was a dead duck'
It is worth noting that while the UDC sale to HNA was only scuppered by the Overseas Investment Office in late December, plenty of people in the marketplace may well have known the deal was a dead duck a long time before this.
We did an update on the proposed UDC sale to HNA in early October and it was clear enough then that the deal was all but dead in the water. With the benefit of hindsight the deal was likely in trouble - in terms of regulatory clearance - as early as July, which perhaps not coincidentally was about the time when serious concerns were being raised globally about the opaque ownership structure of HNA.
The ANZ was not going to call time on the deal till it was officially declared dead of course. ANZ's never commented but you would have to suspect there would have been a 'break fee' in place with this transaction, which meant that if ANZ had tried to pull out early this would have cost it money. That's pure speculation, but it would be not untypical for this kind of deal.
So, anyway, the point is, plenty of people may well have known in advance that the UDC deal was not going to go ahead as originally announced and were therefore preparing for the chance to have another tilt at it.
One of the key sticking points first time around seen with Heartland buying UDC was how it would fund the acquisition.
Well, it's interesting that in November Heartland announced a $59 million capital raising "to support continued growth in its loan portfolio and maintain a strong balance sheet". This was successfully completed in December.
A timely capital raising
If Heartland is seriously in the running to now buy UDC, this capital raising could prove to have been useful and timely.
No, $59 million would not be enough in terms of a UDC acquisition - but what it does mean is that loyal Heartland shareholders have already had a recent chance to top up their shareholdings and so wouldn't mind if Heartland were - for the sake of swiftness - to undertake either an institutional offer or a private placement to help fund a UDC deal. (Shareholders can get very cross if the big boys and girls are given a chance to buy shares and they are not.) And what the heck, in such circumstances, Heartland might in any case be able to go to the well again with its shareholders later, getting more money from them.
How much would it need? Tough to answer.
Estimates of a likely UDC sale price ahead of HNA's offer were in the $500 million to $550 bracket.
My guess is you would now be talking around $450 million to $500 million. (I will explain the reduction in likely price further down.)
Heartland's latest disclosure statement, for the three months to the end of September, showed the bank had total assets of $4.222 billion, with shareholders' funds of $566 million (this before the $59 million capital raising).
The September quarter unaudited net profit after tax was $16 million, 12% higher than for the same period a year earlier. Heartland highlighted the fact that net finance receivables grew $138 million to $3.684 billion, which equates to 16% annualised growth. Heartland reaffirmed its forecast range for annual net profit after tax of between $65 million and $68 million for the June 2018 year, which would represent an increase of up to 12% on the $60.8 million in the June 2017 year.
So, it's not beyond the bounds of possibility that another say $100 million of capital might do the trick for Heartland. Tight possibly, but remember UDC would be earning money from day one, having made a net profit of $61.646 million for the year to September, up from $58.537 million in 2016.
The price may not be as nice
To go back for a moment to why I would expect the price for UDC to now be lower, well, there's a couple of things.
At the time the deal was announced, in January 2017, HNA was putting its hand up to buy anything that moved. And having missed out on the sale by ANZ of its Australian Esanda finance business in 2015, HNA was in no mood to be outbid.
So, the agreed purchase price certainly looked on the high side at the time.
The other point is that while UDC has remained profitable and well run, the retail depositors - who started to creep away when ANZ publicly put the 'for sale' signs on UDC in April 2016, then really started to leave in droves after the conditional sale to HNA was announced at the beginning of last year.
The result has been that ANZ - ironically at a time when it's seeking to exit the business - has been increasingly supporting UDC's financing needs. ANZ's financing of UDC's lending activities was heading for the $1.4 billion mark as at September 30 last year and will most certainly have increased substantially since then. UDC's latest annual accounts show that among the secured debentures as at September 30, some $455 million was due to mature before the end of December. A further $224.6 million is due to mature before the end of March 2018.
New funding needed
It's not beyond the bounds of possibility therefore that ANZ currently has something in the region of $2 billion of financing with UDC. This would need replacing by UDC and new owners.
Now of course, it can be argued that it was always the case that a big source of financing would be needed for UDC. The deal was always that UDC debenture holders would be able to get their money repaid straight away once UDC was sold. But, of course, depending on the buyer, the debenture holders might have agreed to keep their money in if they were happy with the prospect of the new owners. Clearly they weren't happy at the thoughts of HNA.
The problem UDC has is that so many debenture holders have now already headed for the hills and presumably put their little pockets of gold elsewhere. UDC would now have to start, not quite from scratch, but not far off it in terms of building up a debenture programme. If that was the way it wanted to go.
It may be that there's someone out there with deep pockets that can match ANZ's grunt in terms of raising something like $2 billion worth of financing. But it's also not beyond the bounds of possibility that ANZ may - in its eagerness to get a clean sale - agree to leave some financing in UDC till the new buyer can replace it, either with public funding or from elsewhere.
Okay, so reading what I've said here, the obvious question might be: Why should ANZ accept a lesser price than previously and won't it just hold on to UDC now and build it back up?
Well, it could. Obviously.
Repayment at any time
But if you read the latest UDC disclosure statement, this makes a lot of the fact that UDC still has the right (while owned by ANZ) to repay debenture holders at any time. This was agreed to by debenture holders in expectation last year of the HNA deal proceeding - but it remains in place. Now, I can't see new investors flocking to UDC in the meantime while their investments could be returned, or swapped for 'equivalent' ANZ products at any time. What do you do, park $100,000 with UDC for two years only to have the company turn round in six weeks’ time and say it's giving you the money back? What a nuisance.
Clearly this is not a situation intended to go on for long. ANZ's a seller. As soon as possible. Get a clean deal - no long waiting for regulatory approval, get cash in the coffers. HNA? Who were they? Move on, nothing to see here.
I even wonder if after the huge botch up the ANZ head office made of the original sale, perhaps this deal will be negotiated by NZ management. And it might be in their interests to get a buyer known locally and trusted and who might be able to continue a public borrowing programme for UDC.
Time will tell. But having messed it up once, surely ANZ's priority will be to get it right this time - even if the price is not likely to be as mouth-watering.
Disclosure: The writer holds shares in Heartland Bank.