As if the board of Provident Financial (PFG) did not have enough on its plate in turning around the sub-prime lender, it is now fending off the advances of upstart rival Non-Standard Finance (NSF). The troubled group has received a hostile all-share bid from NSF, which has gained the backing of shareholders representing 50 per cent of the target’s share capital.
Under the terms of the deal Provident shareholders would receive 8.88 new Non-Standard Finance shares for each Provident share. Based on NSF’s 58p undisturbed share price, that values Provident’s shares at 511p. Woodford Investment Management, Marathon and Invesco, which are top 20 shareholders in both groups, have pledged their support for the tie-up.
NSF – founded by John van Kuffeler, who served as Provident’s chief for 22 years until 2013 – emphasised its experience in the sub-prime lending sector and said it would seek to address “the Provident board’s limited operational experience in the non-standard finance sector and the significant turnover in senior management at Provident board, group and divisional levels”.
The board of Provident Financial criticised NSF’s failure to engage with it prior to the announcement. The “highly opportunistic” approach was “irresponsible” and “could have a negative and destabilising impact on its stakeholders”, the board said. “NSF has limited regulatory and operational experience within its executive management team of managing a bank.” This is critical given that Vanquis Bank represents the largest asset in the Provident Financial group, the board said.
NSF plans to address its target’s central cost base and bring down the cost-income ratio of the home credit business. A botched reorganisation of that business – which involved switching from self-employed to employed agents – caused a severe reduction in collections rates and forced the consumer credit division into a pre-tax loss in 2017. Meanwhile, Vanquis Bank last year agreed to pay £172m relating to the sale of repayment option plans (ROP), where it failed to adequately disclose interest charges, following a settlement with the Financial Conduct Authority.
The cost of that settlement, combined with restructuring charges associated with the home credit division, forced the lender to launch an emergency rights issue to bolster its capital levels above the regulatory minimum.
Peel Hunt’s Anthony Da Costa is sceptical as to whether stripping out costs will remedy problems at Provident’s home credit business.
“The issue isn’t cost-to-income, it’s income,” he says. “Provident has been investing in people to solve the issue of bringing back the revenue.” Cutting costs could therefore reduce collections, he adds.
The enlarged group would focus on home credit, branch-based and guarantor lending, credit card specialist Vanquis Bank and sell “non-core” motor finance provider Moneybarn and online lender Satsuma. It would involve spinning-out NSF’s home credit business to assist with gaining approval from competition regulators.
Yet UK economic uncertainty and the ongoing FCA investigation into Moneybarn’s forbearance and termination options means trade buyers might be reluctant to bid much for the business, says Mr Da Costa. “I would be surprised if you got a very good price for that business,” he adds.
However, analysts at Goodbody said the tie-up presented “compelling industrial logic”.
The brokerage said: “The primary reason for NSF’s interest in PFG is it sees a massive opportunity in the guarantor lending segment, which they need scale to seek to exploit.”
Shares in Provident rose by almost 14 per cent on the day of the offer and 11 per cent in its would-be acquirer. But we are not convinced that a new management team can sufficiently solve Provident Financial’s manifold challenges, not least Vanquis Bank’s challenge to grow receivables against more stringent affordability testing regulation. It is also worth noting the lacklustre performance of NSF’s shares, which are down more than a third on the 2015 admission price and have underperformed the FTSE All-Shares Index. The 511p offer is equivalent to 10 times 2019 forecast earnings, with no premium built into the bid. Hold Non-Standard Finance and Provident Financial at 64p and 582p, respectively, as management ripostes seem likely to continue.
