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NSF-Provident showdown heading for stalemate

Without regulatory assent by 5 June, Non-Standard Finance’s bid for its larger peer could lapse
May 22, 2019

The fumbling consolidation of the UK’s sub-prime lending market was never likely to prove fertile material for a Mexican stand-off. Showdowns, after all, must at best maintain the fiction of dramatic tension, and at worst avoid a lunge through the saloon doors with a promise to “achieve cost savings, revenue synergies and lower funding costs as well as the potential for capital returns over time from disposals and capital efficiency”.

Yet somehow, upstart Non-Standard Finance’s (NSF) bid to acquire troubled larger peer Provident Financial (PFG) continues to drag on, four months after the deal was first tabled and swiftly rejected. Despite passing an apparent deadline last week, and ahead of an apparently final deadline on 5 June, shareholders on both sides still have little clarity on whether the attempted merger will end in a draw, victory, or a loss for everyone involved.

For readers who have not followed this saga, or simply lost patience, here’s a brief overview: on 22 February, NSF offered Provident shareholders 8.88 new NSF shares for each Provident share they owned, initially valuing the target at 511p. NSF, founded by former Provident chief John van Kuffeler, argued a combined group would be better served under the smaller company’s leadership, which was better placed to bring down the cost-income ratio of Provident’s home credit business.

Woodford Investment Management, Marathon and Invesco – existing investors in NSF, and holders of more than 50 per cent of Provident’s shares – threw their weight behind the deal.

The remaining shareholders have been less than convinced. Despite extending a deadline for acceptances to 15 May, just 53.5 per cent of shareholders in Provident had accepted the hostile takeover, well short of the 90 per cent threshold NSF had initially set at the start of its bid. Undeterred, NSF immediately lowered the acceptance condition to 50 per cent (plus one Provident share), and announced its intention to persuade remaining investors (and Provident’s board) to back the bid and find a “pragmatic and constructive dialogue” before 5 June, the last date on which the offer can be declared wholly unconditional.

Predictably, Provident has shown no sign of acquiescing, and pointed out that until acceptances reach at least 75 per cent, NSF cannot de-list Provident shares or begin a compulsory purchase procedure.

For its part, Provident has sought to paint the bid as doubly disruptive, twice alerting investors to the substantial fees it has incurred – “in the range of £19m to £21m” – since NSF went hostile. Most of those costs have come from financial and corporate broking advice, although £0.4m has also been spent on the forensic accounting advice it received to highlight what it described as “NSF's unlawful shareholder distributions”.

With the spat having long turned combative, attention now turns to the regulators’ view of the deal. NSF needs approval from both the Financial Conduct Authority and Prudential Regulation Authority to secure the deal by 5 June, which does not appear a forgone conclusion. Should it receive backing from those watchdogs, it could then be forced to decide whether to declare the offer wholly unconditional, even if clearance has not yet been granted by the Competition and Markets Authority (CMA).

Analysts at Goodbody described NSF’s decision to go unconditional “relatively audacious” considering the low number of additional acceptances, and suggested the group would be unlikely to declare the offer wholly unconditional without securing 75 per cent support from Provident shareholders by 5 June. However, the brokerage also reckons that an increase in acceptances close to the 75 per cent threshold could give NSF and its backers enough confidence to proceed, “as NSF could subsequently acquire more Provident stock over time in the open market and would also work more intensively on the non-assenting shareholders” after 5 June. 

Should NSF fail to boost support in the next fortnight, the question for Mr van Kuffeler et al will presumably be how to save face in front of its backers. Goodbody reckons a decision not to waive the CMA condition could act as a “get out of jail” card, at the risk of angering the Takeover Panel.