FirstRand Ltd (FSR:SJ) – market cap as of 11/10/2017: ZAR295.3bn
Aldermore Group Plc (ALD:LN) – market cap as of 11/10/2017: GBP1.07bn
Introduction
FirstRand and Aldermore, as of 6 November 2017, have agreed upon merging in a £1.1bn deal, at 313 pence per share in cash which implies a 22% premium on the last business day prior to the offer period (35% on the six months volume weighted average price). Looking at the tangible book value, the offer implies a 1.8x P/TBV multiple. The two banks will benefit from a cultural fit and Aldermore management believes the deal will ensure further diversification of product portfolio and growth, also thanks to the entrepreneurial ability to develop new businesses. FirstRand will shift part of its income to the UK since, as of now, 96% of earnings is generated in Africa. Moreover, the UK branch of FirstRand, MotoNovo, will benefit also from the widening of the product portfolio as it is currently focused only on second-hand vehicles financing.
About First Rand Ltd
FirstRand Ltd is South Africa’s largest financial services institution by market capitalisation (c. ZAR 295.5bn as of 11 November 2017). In addition to South Africa, the FirstRand Group operates in the United Kingdom, sub-Saharan Africa and India.
FirstRand aims to create long-term franchise value, ensure sustainable and superior returns for shareholders within acceptable levels of volatility and maintain balance sheet strength. It executes its strategy through a portfolio of separately branded operating franchises comprising First National Bank, Rand Merchant Bank, WesBank and Ashburton Investments which provide transactional, lending, savings, investment and insurance products and services.
The lending and transactional activities remain the largest contributors to revenue (c. 83%). The group is heavily concentrated in South Africa, with the domestic business accounting for 90% of pre-tax profits. The FirstRand Group’s track record of superior returns to shareholders has been achieved through a combination of organic growth, acquisitions, innovation and the creation of completely new businesses.
For the year ended June 30, 2017 reported income from operations of ZAR 62,614m compared to ZAR 58,408m in previous year. Moreover, 7% growth of earnings per share and ROE of 23.4% have been realized.
About Aldermore Bank
Aldermore was founded in 2009 as an alternative to traditional banks by a former Barclays executive with backing from private equity firm AnaCap. Aldermore is one of a group of so-called challenger banks that emerged after the financial crisis to address the institutionalised weaknesses in service and culture among the UK’s large banks. Its primary focus is lending to small businesses, and deals mainly in asset finance, invoice finance and buy-to-let mortgages in the UK. Aldermore has been among the strongest performing challenger lenders since Brexit, with its share price up more than 75% in the past year. It’s customer-driven strategy has contributed to its successful positioning as one of the leading UK challenger banks.
The bank has grown significantly since its establishment and now has about 230,000 customers and over 900 employees. It operates with scalable infrastructure with no physical branches, but serves customers online, by phone and in person from regional offices in the UK.
At the end of 2016, loans to customers amounted to £7.5bn (FY2015: £6.1bn), customer deposits totalled £6.7bn (FY2015: £5.7bn) and the total capital ratio was 15.6%. Aldermore delivered profit before tax for 2016 of £132.8m and a return on equity of 18.0%. Positive momentum continues in the latest quarter with increase in new lending, customer deposits and stable net interest margin at 3.5%.
Deal structure
FirstRand offer is to pay for the entire ‘issued’ and ‘to be issued’ share capital of Aldermore in cash. For each ordinary share, FirstRand has agreed to pay 313 pence. The total value amounts to £1.1bn. The offeror will pay a 22% premium on the closing price per ordinary share on 12 October 2017 (256 pence), a 38% premium on the 3-month weighted average (227 pence) and 35% premium of the 6-month weighted average closing price (232 pence). The valuation multiple stands at 1.8x Aldermore’s reported Net Tangible Book Value of £607m. Aldermore’s investors will receive an immediate payment representing a 63% return since IPO.
The acquisition will be funded in full from the FirstRand Group’s existing cash resources. FirstRand Bank Limited will provide a loan facility to FirstRand Offeror on an Intra-Group Loan Agreement amounting to an aggregate principal amount of £1.3bn. Interest will accrue day to day at 1-month LIBOR plus 75 basis points. In accordance with the strategy of the company, the acquisition will not lower the CET 1 ratio below 11%. Currently the ratio stands at 14.3% and is estimated to drop to 11.7 % post acquisition. The high CET 1 ratio will help manage the impact of the transaction on goodwill. Moreover, the deal should not impact announced dividend strategy.
The transaction is subject to customary regulatory approvals and other customary closing conditions.
Deal rationale
Aldermore’s directors believe that under the new ownership, Aldermore would improve its growth profile through product diversification and the possibility to access FirstRand Group’s transaction banking and other capabilities. Aldermore also highly values its buyer’s ability to develop entrepreneurial businesses and believes the companies are strategically and culturally fit for each other.
On the other hand, the acquisition will increase the exposure of FirstRand to the UK market. Currently, c. 96% of total group earnings is generated in South Africa, the rest of Africa and India, while 4% is generated from MotoNovo in the UK. FirstRand aims at diversifying its sales portfolio and develop a sustainable UK franchise. Motonovo is one of the leading providers of motor finance for second hand vehicles. It is undiversified from a market and product viewpoint, with a prospect to expand into personal loans and insurance business. Aldemore’s acquisition will help the diversification process because of its strong position in the SME, Mortgage and Savings markets. In addition, Aldermore brings a UK banking license to the table and the possibility of a more sustainable funding model. Until now, MotoNovo has been funded through a mix of UK securitisations, warehouse facilities and the FirstRand Group’s South African balance sheet. Receiving funding from Aldermore’s deposit and its funding platform has the additional advantage of freeing up liquidity capacity for FirstRand.
For the short term, value added may come from fund transfer pricing and optimization of asset mix. In a longer perspective, FirstRand can benefit from cross-sell opportunities between MotoNovo and Aldermore and the broadening of financial services.
Market reaction
On October 12, 2017, the day of beginning speculations about the deal going through, Aldermore shares jumped up by 18% on the London Stock Exchange; FirstRand gave up 1.4% in Johannesburg trading.
Financial Advisors
Credit Suisse and Rand Merchant Bank advised FirstRand. JPMorgan Cazenove, RBC Capital Markets and Lazard advised Aldermore.
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