By David Hargreaves
For the ANZ Bank, the proposed sale of its UDC Finance subsidiary is the imagined quick flick that turned into a long running saga.
It is now a little over two years since ANZ’s head office in Melbourne made clear that it was looking to sell UDC, a vehicle and asset finance provider that’s been going for 80 years. It sources funding from the public via offering secured investments, as well as being backed by ANZ.
At the time there seemed few obstacles to ANZ achieving a quick sale – given that UDC’s a long established business with a strong track record of profitability, with its latest financial result being a record net profit after tax of $61.6 million for the year to 30 September 2017, a 5% increase on the previous financial year..
And in fairness to the ANZ it thought it had sold UDC. The sale of it was announced in early last year to the incredibly acquisitive, but opaque, Chinese conglomerate HNA, which at the time was on a multi-billion dollar global spending spree.
The deal required Overseas Investment Office approval, which is what ultimately sank it – and arguably saved UDC from some real problems. In recent months HNA has gone into complete reverse and has been offloading many of the assets it bought as it fights to bring down debt.
When officially torpedoing the deal in December, the OIO gave as the reason the fact it could not actually establish who HNA’s owners were.
The full details of the OIO decision more recently released, however, show that there was rather more to it than that.
So, after formally ending the sale agreement for UDC to HNA in January, the ANZ has maintained a view that it’s not in a hurry to sale its New Zealand finance subsidiary.
In March, however, it said it might consider offloading UDC via a share float.
While that might ultimately be the outcome, this writer finds it difficult to imagine that having initially favoured a ‘trade sale’, ANZ wouldn’t still find a trade sale the preferred option. If it really wanted to IPO UDC, why not do that two years ago?
It’s entirely possible that the ANZ having originally got a ‘top dollar’ offer of $660 million for UDC from HNA has found that the potential trade buyers it has spoken to after the collapse of the HNA deal have been talking much lower figures than $660 million to buy UDC. Market speculation on the value of UDC prior to HNA jumping in with a bid was more in the region of $500 million.
It’s therefore also entirely possible that ANZ now talking up the possibility of a public offer of UDC shares is a way of getting some, shall we say ‘pricing tension’ into the bidding for the business. It’s one way of saying to potential trade buyers that if they don’t cough up the right price, ANZ does have other options.
In fact the ‘dual track’ sale process is a common enough technique, whereby the seller of a business goes down the track of preparing the business for and initial public offering (IPO) while also continuing to negotiate with potential private buyers.
And this is undoubtedly what the ANZ is doing at the moment. If ANZ ultimately ends up offering UDC shares through an IPO it will only be because it didn’t get the price it wanted through a trade sale.
In terms of would-be ‘trade’ buyers, New Zealand’s Heartland Bank has made clear from the outset – IE about two years ago – that it would be keen, although it would need to conduct a capital raising. A spokesperson reaffirmed this week that Heartland remains interested.
The need for Heartland to raise capital might be seen as some obstacle for it to buy UDC – but there’s another possibility as to why ANZ might be a reluctant seller to it.
Perhaps it doesn’t want UDC in the hands of a competing New Zealand bank. It might be seen as more suitable for ANZ to sell it to a business that either hasn’t got a presence in NZ now (HNA didn’t) or at least is not involved in banking and financing now as a competitor.
More recently, Australian media reports have speculated on two large, acquisitive, and well-connected life insurance companies as being in the mix to buy UDC.
Often such speculation comes to the media from investment banks involved in brokering deals – and is therefore fairly accurate. But there’s got to be some doubts about the veracity of some of the information and purported identities of those interested in buying UDC. And it’s not clear to this observer why that would be the case.
Life insurance companies buying a vehicle and asset financing company? Really? Well, businesses do look to diversify, so, all you can do is try to find out. So, we attempted to.
In the frame
One of the companies purportedly interested is Asia-originated life and health insurer AIA (which is Bermuda based and Hong Kong-managed). It has been on the acquisition trail, agreeing in September last year to buy the insurance businesses of Commonwealth Bank in Australia and New Zealand (Sovereign Assurance in New Zealand), with the deals aimed for completion this year.
An AIA New Zealand spokesperson said the company has a policy of not commenting on market speculation. So no clear steer there.
The other life insurance company speculated to be interested was a bit more forthright, however. Takapuna-based Partners Life, which has also been on the growth trail, is chaired by long-time Tower executive Jim Minto, while its roster of extremely seasoned directors also includes recent NZX chief executive Tim Bennett.
Managing director Naomi Ballantyne, who has over 30 years of experience in the New Zealand life insurance industry gave an unequivocal denial on the UDC rumours.
There was, she says, “no basis” for the speculation, and Partners Life has “no interest” in moving out of insurance and into the finance business.
“Somebody put one and one together and got six,” she said.
ANZ said through a spokesperson this week it had nothing further to add on where the UDC sales process is at the moment.
In a March 20 statement released through the stock exchange ANZ New Zealand chief executive David Hisco said the options for UDC would include exploring whether, subject to market conditions, an IPO would be in the interests of UDC’s staff and customers, and ANZ shareholders.
“The range of strategic options we have for UDC, including approaches we have received regarding the business and the option of retaining it, will take a number of months to examine before any decision is made. In the meantime, it will continue to be business as usual for UDC,” Mr Hisco said.
Maybe business as what passes for usual now, but in truth it’s not business quite as it was before ANZ made clear it wanted to sell UDC. Profitability for UDC has continued to increase. So, has lending. But it’s funding mix has changed a lot and – ironically given that ANZ is trying to flick it – UDC is now more dependent than before for funding from the ANZ, something that might potentially make the sale of UDC more difficult, given that the ANZ funding would need replacing.
UDC's interim financial report for the period to March 2016 - just before the 'for sale' signs went on UDC - showed that secured investors had deposits with UDC totalling $1.737 billion, while ANZ had advanced its subsidiary $380 million. That means 82% of UDC's borrowings were funded by the public and just 18% by ANZ. As of UDC's last annual result date of September 30 2017 that statistic had turned around abruptly, with secured investments making up just 43% of borrowings and ANZ 57%.
Half a billion dollars withdrawn
Something like half a billion dollars’ worth of secured investments was withdrawn from UDC while it was under offer from HNA. Figures from ANZ’s December disclosure statement show that withdrawals slowed markedly in the December quarter – but the amount of secured investments still dropped below the billion dollar mark, at $972 million.
While the ANZ’s still talking up its flexibility when it comes to ownership of UDC and that it doesn’t have to rush into anything, the fact is the current UDC disclosure statement points out 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. The fact that this is in place would tend to mitigate against large numbers of new investors coming in, because a new investor would presumably be reluctant to commit to a supposed term investment, only to find they are being paid back possibly only weeks later and then have to reinvest it again.
Only if ANZ were to change things up and removed the early repayment conditions would you then know that the 'for sale' signs have been removed from UDC. But given that ANZ has been driving down the rocky road to a sale for over two years now, it would be some sort of u-turn.
I would still anticipate a sale sooner rather than later and, as I say, if there is to be a UDC share offer it will be only because the potential trade buyers are not prepared to cough up enough money to satisfy the ANZ bean counters.
Disclosure: The writer holds shares in Heartland Bank.