By Gareth Vaughan
Heartland New Zealand, the combined Marac Finance, CBS Canterbury, and Southern Cross Building Society, is to buy PGG Wrightson Finance from the Agria Corporation controlled PGG Wrightson for about NZ$100 million.
The deal, with Heartland buying all PGG Wrightson's shares, requires various shareholder, deposit holder and regulatory approvals. If these are obtained, it's expected to go unconditional on about August 31. The purchase price is the equivalent of PGG Wrightson Finance's adjusted net tangible assets. Heartland plans to issue at least NZ$55 million worth of new shares to help fund the deal.
Heartland will take on between NZ$400 and NZ$430 million worth of PGG Wrightson Finance loans. Heartland will also receive a licence to use the PGG Wrightson Finance brand in association with certain products through a distribution agreement. China's Agria took control of PGG Wrightson earlier this year after obtaining a 50.1% stake.
Banking licence application 'on track'
"PGG Wrightson Finance will be an engine for growth in the rural sector for the Heartland group and will provide the foundation to achieve the group’s desired portfolio of an equal share of assets across the business, household and rural sectors which comprise the backbone of the New Zealand economy," said Heartland managing director Jeff Greenslade.
“This transaction will add value to Heartland shareholders and is forecast to increase earnings per share and provide opportunities for growth. The acquisition is highly complementary with the existing Heartland business and can be integrated efficiently. We have factored the acquisition in to our banking licence application process, which remains on track,” Greenslade added.
It plans to apply for a banking licence in the second-half of the year.
Once PGG Wrightson Finance is integrated, Heartland will have an asset base of about NZ$2.6 billion. Excluded from the deal are PGG Wrightson Finance receivables worth about NZ$95 million ,which will be retained by PGG Wrightson.
"In addition, approximately NZ$30 million of PGG Wrightson Finance’s finance receivables will be subject to a guarantee from PGG Wrightson Limited."
PGG Wrightson Finance debenture holders must approve the deal as their debt will become Heartland obligations. PGG Wrightson Finance will continue trading under that name alongside the Heartland Rural brand. The deal will lift Heartland's rural exposure to 21% of its total loans.
Treasury approval needed
Heartland and PGG Wrightson Finance are two of just four entities covered by the extended Crown retail deposit guarantee scheme.
Heartland says a strategic alliance with PGG Wrightson means the latter will to continue to provide customers with PGG Wrightson Finance services and "an enhanced, broader range of financial products.”
The deal is expected to settle on or about 31 August subject to certain conditions being satisfied, including approval from Treasury, shareholders, PGG Wrightson Finance debenture holders and Heartland's equity raising.
Heartland plans to raise a minimum of NZ$55 million.
"This will be done by a combination of private placement and a Share Purchase Plan (“SPP”)," it said.
"Placements for NZ$20 million at 75 cents per share are agreed with PGG Wrightson (NZ$10 million) to underpin the strategic alliance with Heartland and a further NZ$10 million with (Marac's parent) Pyne Gould Corporation. PGC has also agreed key terms to participate with another (un-named) party which means that Heartland expects to have the minimum level of NZ$55 million of the capital raising and SPP underwritten."
Heartland's shares rose 2c to 74c this morning.
It said the SPP price was yet to be finalised. Craigs Investment Partners has been hired to lead manage the capital raising process.
'Modest' profit forecast
Meanwhile, tacked on the bottom of its announcement Heartland said it was projecting "a modest" net profit after tax for the year to June 30 of between NZ$6 million to NZ$8 million. The group expects "substantial" one-off costs associated with the this year's merger, investment both in new infrastructure aimed at meeting bank standards and distribution channels aimed at fostering growth.
"Post-acquisition, the forecast net profit for the combined business in the 2012 financial year is expected to be in the range of NZ$20 million to NZ$24 million and it is expected that targeted levels of returns on equity in excess of 10% are anticipated to be achieved in the 2013 financial year," Heartland said.
"The Board is soon to announce its dividend policy but it is intended that subject to meeting net profit targets and regulatory capital requirements Heartland will be a regular dividend payer from 2012 onwards."
(Update adds reaction of Heartland NZ's share price).