Speculation that consumer finance provider FlexiGroup Limited (ASX: FXL) has to undertake a capital raising to fund an acquisition has done little to dampen enthusiasm for the stock today.
Shares in FlexiGroup rallied 2.5% to $2.46 following reports in the Australian Financial Review that the company has won the fight to buy New Zealand-based Fisher & Paykel Finance for around $NZ300 million ($272.7 million).
The deal is expected to be announced next week along with details of a capital raising to fund the acquisition.
The share price of companies looking to tap shareholders on the shoulder for cash usually falls as the new share offer is typically done at a discount to the current share price.
Flexigroup will have to raise cash for the deal and the more cash a company needs the bigger the discount it has to offer.
I estimate that Flexigroup will require around $200-$300 million if the reported asking price for Fisher & Paykel Finance is on the money as Flexigroup has around $130 million in cash and a gross debt-to-equity ratio that's over 300%.
Given that Flexigroup's market capitalisation stands at $739 million, an equity raising even at the low end of the range would represent a 27% increase in its market size.
Flexigroup's gearing seems incredibly high too, but most of the group's $1.3 billion in borrowings is asset backed – meaning it's tied to the equipment that the consumer is renting or purchasing on so-called interest free terms.
However, I suspect banks will be reluctant to lend to Flexigroup to consummate the acquisition and Flexigroup will need to retain a chunk of its cash holdings for working capital and other expenses related to the deal.
On the other hand, the acquisition could help trigger the elusive re-rating in the company following the exit of a number of Flexigroup's senior executives like its chief executive Tarek Robbiati and chairman Chris Beare.
Shares in Flexigroup have crashed a further 8% since its full year result announcement last month as I had foreshadowed due to uncertainty over its leadership team and growth outlook.
The buyout of Fisher & Paykel Finance could help address at least one of these issues although it's hard to judge until the financial details are released.
But it is believed that Flexigroup can achieve a significant amount of synergies from the takeover as Fisher & Paykel Finance offers similar consumer solutions to Flexigroup, which has a modest presence in New Zealand.
Coincidentally, this isn't the only financing-related transaction that the market is watching. Macquarie Group Ltd (ASX: MQG) is also believed to be the frontrunner to buy Australia and New Zealand Banking Group's (ASX: ANZ) car financing and novated leasing business Esanda.
Flexigroup isn't out of the woods yet but value investors should be keenly watching to see if it unveils compelling acquisition metrics for Fisher & Paykel Finance next week as that could well be the basis for a re-rating in the stock.
