In an ASX media release today, FlexiGroup Limited (ASX: FXL) announced the 'transformational' acquisition of New Zealand's Fisher & Paykel Finance (F&P Finance) for $275 million.
F&P Finance is a leading non-bank consumer credit provider in New Zealand with 430,000 active card holders and business volumes of $617 million.
FlexiGroup believes the acquisition is a significant opportunity to diversify its operations and drive value for its retail partners. The combined group will boast over $2 billion in receivables.
According to FlexiGroup, the deal will be earnings per share accretive. The deal will be funded from a $150 million fully underwritten 1-4.46 pro-rata accelerated non-renounceable entitlement offer and an expansion of current credit facilities to $187.5 million. That means shareholders have the right to buy 1 new share for every 4.46 they currently hold, at the discounted offer price of $2.20.
FlexiGroup Chairman, Andrew Abercrombie, currently the company's largest shareholder with 25.4% of all shares, will take up 71% ($27 million) of his full entitlement.
"Fisher & Paykel Finance is a very high quality asset that FlexiGroup worked hard to secure because it compliments and offers synergy to FlexiGroup's existing card business," FlexiGroup's acting CEO, David Stevens, said. "Cards are a scale driven business and F&P Finance has over 430,000 active card holders, providing FlexiGroup with a Trans-Tasman interest free cards offering, and a compelling proposition for our retail partners."
Advised by investment bank Citigroup, Mr Stevens said the deal is compelling because the company will be able to derive synergies and scale from the combined business. "The financial metrics are compelling with clearly identified synergies and an attractive transaction funding structure in place, including a deferred consideration component."
The purchase price of $275 million represents a multiple of 8.8 times expected 'cash' net profit after taking into account expected synergies, or 2.9 times the value of the net assets on F&P Finance's balance sheet.
Pleasingly, FlexiGroup also took the opportunity to reaffirm its full-year cash profit guidance of between $92 and $94 million, excluding acquisition costs. The dividend is expected to be at the lower end of the range of 50% to 60% of cash net profit.
Foolish takeaway
FlexiGroup is a well-run business. However, despite its solid track record the potential for regulatory changes and an ongoing search for a CEO leave Flexigroup shares looking very cheap using conventional valuation metrics. It's also forecast to pay a dividend of 5.7% fully franked.
While today's acquisition appears a little expensive — and a renounceable entitlement offer would've been fairer to all shareholders — I think the deal could bring significant long-term benefits to the company. However, it'll be important to monitor developments on the expected synergies over the next 12 months closely, since takeovers can all-too-often have a few nasties hidden beneath the surface.
