Why Yellow Brick Road Holdings Ltd jumped 17%

Mortgage broker and wealth manager, Yellow Brick Road Holdings (ASX: YBR) has seen its shares rally more than 17% today to 61 cents, after the company revealed it was in discussions to make three potential acquisitions, and reaffirmed guidance to become profitable in the 2015 financial year.

Just last week, Yellow Brick Road announced a potential buyback of up to 10% of shares (around 18 million). Today the company announced that it was forming a ‘non-bank’ holding company as the owner of Yellow Brick Road Group, 50% of YBR Funds Management, and the three new acquisitions.

Yellow Brick Road’s first potential acquisition is a consumer product comparison company that can generate consumer leads, while the second and third are mortgage related. One is a mortgage broker aggregator, while the other is a mortgage manager that does credit assessments, settlement of mortgages, redraws and discharges as well as arrears and enforcement management. All three are expected to complement Yellow Brick Road’s existing businesses, while the company can grow the new acquisitions through full access to the Yellow Brick Road mortgage broking and wealth management business.

Should the company go ahead with all three acquisitions, Yellow Brick Road will become the third-largest non-bank holder of outstanding residential mortgages, estimated at more than $20 billion, leapfrogging Homeloans Limited (ASX: HOM), Mystate Limited (ASX: MYS) and Wide Bay Australia Ltd (ASX: WBB).

Australian Finance Group (AFG) holds the largest mortgage book estimated at around $65 billion as at January 2014. Mortgage Choice Limited (ASX: MOC) is second in the non-bank sector, with just under $50 billion in mortgages. Aussie Home Loans has an estimated $55 billion but is majority owned by Commonwealth Bank of Australia (ASX: CBA), so is regarded as bank-controlled by Yellow Brick Road.

Foolish takeaway

We await further details of the three potential acquisitions Yellow Brick Road is currently assessing, including the price paid and expected contribution to the new group. Should they go ahead, investors may want to keep a close eye on the company, with potential for the acquisitions to put a rocket under Yellow Brick Road’s future earnings.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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