Allied Farmers, better known as a Taranaki-based rural servicing firm, yesterday announced it had signed an agreement with Hanover and United to buy the finance assets of both in a deal worth about $400 million.
Hanover debenture holders will get an average of 78c for every dollar owed and United holders will get about 90c.
Craigs Investment Partners broker Chris Timms said the deal was interesting for the fact that natural income earner investors, who were used to buying debentures, would now be issued with shares, or equity.
"They will either try and sell them in the market and incur more cost as they exit, or they are stuck waiting and hoping they get all their money back through a stronger performing finance company."
There was the potential for the market to be flooded with Allied Farmers shares as the company issued 900 million new shares valued at around 44c each.
Yesterday, the shares were trading at 35c, up 2c after the announcement.
In the short-term, Mr Timms expected many people to say they did not want the shares and try to sell.
That would cause a significant lift in the volume of shares put through the market with the potential to cause a steep fall in the price.
Allied Farmers chairman John Loughlin told the Otago Daily Times that the assets to be taken over by his company included the troubled Queenstown investments of Five Mile and Kawarau Falls.
It was logical to look at selling the Five Mile project but Allied was not in the "driving seat" for Kawarau Falls which was a "challenging asset".
"There are a range of opportunities there ranging from good to poor."
There had been a lot of interest in Five Mile and Mr Loughlin seemed optimistic about its future.
Mr Timms said the challenge for Allied was turning itself from a rural services company with market capitalisation of $13 million into a three-pronged company moving into the NZX-50.
By moving into the top 50 listed companies, funds which specialised in those investments would have to start buying Allied shares, he said.
Allied would have to prove it had the expertise to manage a large finance operation.
"This is an opportunistic move by Allied. We are likely to see a rationalisation in the finance industry and this is one of the first moves. It changes them. They will now be one of the top four finance companies in New Zealand," Mr Timms said.
Mr Loughlin said one of the key advantages of the proposed transaction was that Allied's finance subsidiary, Allied Nationwide Finance, had an existing structure with which to manage the loans and assets.
"We expect to be able to strip a lot of the cost out of the current debt restructure plan which Hanover and United have been working under and in that way we expect to be able to maximise recoveries at least cost."
The key to the transaction was achieving a high level of understanding of the nature of the Hanover and United assets, he said.
Some of those assets had gained a degree of notoriety, but that should not detract from the fact that all property assets had a price at which investors would see the benefit of buying them.
Allied would have three divisions, the rural servicing company, a finance company with sound assets, including $50 million of Hanover and United assets, and a company to manage the challenging or difficult assets.
Of the total assets acquired, about 20% were performing while the balance were non-performing.
Managing director Rob Alloway would take charge of all non-performing assets and the remaining performing assets which did not move to Nationwide, Mr Loughlin said.
The effect would be that Nationwide and Allied, as the parent, would receive a significant injection of equity into their balance sheets and an increase in size, which would enable both to look at further acquisitions.
For Nationwide, there was an anticipation of an improved credit rating and a consequent drop in funding costs.
At a glance
- Allied Farmers bids for Hanover Finance and United Finance assets.
- Deal worth $400 million, with 900 million new shares to be issued.
- Approval needed from 50% of Allied shareholders and 75% of Hanover and United investors.
- Deal expected to be completed before Christmas.
What is Allied Farmers?
Formerly The Farmers Co-Operative Organisation Society of NZ Ltd, the company was incorporated in 1913, becoming a major Taranaki-based regional stock and station agency business.
The company listed on the Stock Exchange in May 2002, without the need for a public share issue.
Today, it trades as Taranaki Farmers, Waikato Farmers, King Country Farmers and Manawatu Farmers, and incorporates subsidiary companies Allied Farmers Finance Ltd and Allied Farmers Wools Ltd.
In November 2003, the company acquired the assets and business of NDG Pine.
In March 2005, the company entered into an agreement to purchase a controlling stake in Prime Finance Ltd.
The amalgamation was finalised in September 2006.
Prime is a prominent finance company specialising in the lending to manufacturers, distributors and importers.
In May 2007, the company closed its Wanganui sawmill subsidiary Allied Pine and purchased Nationwide Finance from the Hanover Group.
Nationwide Finance was then merged with Allied Prime Finance. During September 2008, Allied completed the purchase and amalgamation of Speirs Finance Limited for a consideration of $5.6 million, including $3.1 million in cash and 1.8 million shares in Allied Farmers.
Nationwide Finance has been part of the Crown deposit guarantee scheme.
Allied Farmers reported a group loss of $33.3 million for the year ended June.
The main contributor to the loss was the reduction in the carrying value of Nationwide Finance to $35 million.
