Acquisition of S&U plc's Home Credit Division

RNS Number : 3911S

Non-Standard Finance PLC

07 July 2015

 

Non-Standard Finance plc

("Non-Standard Finance," "NSF" or "the Company")

Acquisition of S&U plc's Home Credit Division for £82.5 million

Non-Standard Finance, which has been established to acquire and operate one or more non-standard consumer finance businesses, has entered into an agreement to acquire the Home Credit Division of S&U plc ("S&U") which trades as Loansathome4u for £82.5 million, payable in cash from NSF's existing resources, subject to approval by S&U's shareholders and customary closing conditions (the "Acquisition").

Highlights of the acquisition

Loansathome4u fully meets Non-Standard Finance's acquisition criteria

§ A top three participant in the home credit market with 77 years of history

§ Strong brand recognition through doorstep model supporting customer relationships and franchise strength

§ High quality loan book compared to the wider home credit market with good underwriting and sensitive customer management

§ £82.5 million valuation represents 12.5x pro forma profit after tax and 2.5x tangible book value

§ Platform for further growth and business development

John van Kuffeler, NSF's Chairman, said:

"I am delighted to announce a significant first step in the implementation of our strategy. Loansathome4u is a leading player in the home collected-credit market. It provides us with a well-established platform; a growing business; attractive operating margins and return on assets; and will form a strong base for NSF as we grow organically and acquire new businesses.

"We believe that the application of our management expertise will re-energise and add significant value to Loansathome4u's business over time. We have already hired additional management; and we will expand the branch network and agent workforce; and invest in systems and technology. We remain committed to offering financial services to a disenfranchised part of the UK's population by treating customers fairly, delivering excellent service and lending responsibly."

Non-Standard Finance's strategy for Loansathome4u

§ Loansathome4u will be run as a division of NSF, to be led by Mark Bardsley as Chief Executive, former Managing Director of SFS and previously a senior executive at Provident Financial and International Personal Finance

§ The business's branch network and agent workforce will be expanded to grow the customer base

§ Non-Standard Finance will invest in systems and technology to further enhance Loansathome4u's underwriting processes to support increased customer acquisition. This will include the deployment of mobile technology across the agent workforce to increase efficiency

§ Loansathome4u's compliance function will be expanded to support best-in-class customer outcomes

§ Additional management will be appointed to support the creation of a larger business, including a Compliance Director, Finance Director, Risk Director and Commercial Director

§ Further acquisition opportunities to be sought as the home credit industry consolidates in light of increasing regulation

Financial highlights

§ Revenue of £38.3 million up 10.7% in FY15, (FY14: £34.6 million)

§ Profit before tax of £8.4 million up 7.7% in FY15, (FY14: £7.8 million)

§ Attractive return on assets* of 24.5% in FY15, (FY14: 23.2%) with scope to grow in the medium term

§ Cost to income ratio of 56.1% in FY15, (FY14: 55.2%) with operational gearing expected to reduce the cost to income ratio as Non-Standard Finance executes on its strategy

§ Robust business, with last reported collections up 12% year-on-year on a 7% rise in customer loans at year end

* Return on assets defined as FY15 profit before tax divided by the average of FY14 and FY15 amounts receivable from customers 

The disposal of Loansathome4u by S&U constitutes a Class 1 disposal transaction for S&U and requires approval by S&U's shareholders. S&U intends to issue a circular to its shareholders convening a General Meeting, expected to take place shortly. Non-Standard Finance has received irrevocable commitments from shareholders representing approximately 52% of S&U's shares to vote in favour of the disposal at a General Meeting of S&U shareholders. Non-Standard Finance is not required to seek shareholder approval for the Acquisition.

Impact on Non-Standard Finance shareholders

The Acquisition, if completed, will be classified as a reverse takeover of Non-Standard Finance under the Listing Rules of the UK Listing Authority. Non-Standard Finance intends to seek re-admission of its Ordinary Shares to a standard listing on the Official List and trading on the London Stock Exchange as soon as practicable following the Acquisition's approval by S&U's shareholders and closing of the transaction.

The eligibility of the enlarged Group to be admitted to the Official List has not yet been agreed with the UK Listing Authority, although an application regarding its eligibility will be made shortly.

A prospectus will be required to be published in relation to the application for admission to the Official List. Such a prospectus would include audited financial statements of Loansathome4u prepared in accordance with the Listing Rules and the Prospectus Rules of the UK Listing Authority.

Although S&U is subject to a public disclosure regime under the Listing Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority, under Listing Rule 5 Non-Standard Finance is required to provide certain additional information regarding Loansathome4u to ensure that there is sufficient information available to the public with regard to the proposed Acquisition in order to avoid a suspension of the Company's shares. The information required under Listing Rule 5.6.15G is set out below.

Information on Loansathome4u

Introduction

Loansathome4u operates from 39 branches throughout England, Wales and Scotland. It operates and is licensed through two companies: S&U is part of the holding company, S&U plc, and has 19 branches throughout the Midlands, South of England, South Wales and South Yorkshire; SD Taylor is a wholly owned subsidiary of S&U plc which covers the North of England, North Wales and Central and Southern Scotland. Loansathome4u is the trading name for both home credit companies which employ over 300 people and operate through approximately 530 self-employed agents. These employees and agents provide a home credit service to 100,000 customers.

Historically Loansathome4u provided the core of S&U plc's earnings and has generated, on average, cash before taxation and dividend payments of £6.6 million per annum over the course of the last three financial years. It has produced consistent revenues and profit before tax reaching £38.3 million and £8.4 million respectively in the year ended 31 January 2015. The loan book at that date was £34.6 million and net assets of £33.1 million, excluding a £16.3 million inter-company receivable balance.

Accounting policies and historical Financial Information relating to Loansathome4u

S&U prepares its consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). As Loansathome4u is a subset of S&U, financial statements for S&U also include entities which would not form part of the enlarged Non-Standard Finance. Therefore, unaudited "carve-out" Financial Information has been prepared for Loansathome4u for the financial years ended 31 January 2013, 31 January 2014 and 31 January 2015 (collectively the "Unaudited Carve Out Financial Information"). The Unaudited Carve Out Financial Information has been prepared using the IFRS accounting policies which will be used by Non-Standard Finance except as described below in the section titled "Basis of preparation" which describes the departures from IFRS. In accordance with Listing Rule 5.6.15G(1), the Unaudited Carve Out Financial Information is set out in the annex to this document.

No material differences between the accounting policies adopted by the Group and those adopted by Loansathome4u in the Unaudited Carve Out Financial Information for the years presented in this announcement have been identified, although the Group may review the application of accounting policy with regard to provisioning following the completion of the Acquisition. Audited historical Financial Information covering the years ended 31 January 2013, 31 January 2014 and 31 January 2015 and in accordance with the Prospectus Directive regulation, the Listing Rules and the basis of preparation (included in the annex to this document) will be included within the Non-Standard Finance Prospectus ("HFI"). 

Key non-financial operating and performance information on Loansathome4u

In accordance with Listing Rule 5.6.15G(2), set out below is the key non-financial operating and performance information relating to Loansathome4u, as well as trend information for the period from 1 February 2015 to the date of this announcement.

The UK home credit market consists of approximately 3 million individual customers of which 1.5-2.0 million are active at any one time. The largest 3 incumbents - Provident Financial, SFS/Morses and Loansathome4u - make up roughly 75% of the overall market with the remainder being served by smaller, local credit providers. Customers of Loansathome4u typically borrow two or three unsecured weekly loans per year, with each loan averaging £300 advance and £480 repayable over average term of 35 weeks.

The home credit market has been regulated by the FCA since April 2014. The introduction of the FCA regulatory regime is expected to put increasing pressure on the smaller competitors and drive market share gains for the larger incumbents.

A recent trend in the sector has also been an increasing focus by Loansathome4u's peers on rationalising their customer bases and a resultant scaling back of their operations - when considered alongside the new regulatory environment this presents a significant opportunity for both organic and inorganic growth for Loansathome4u.

Loansathome4u trading since 31 January 2015

S&U issued an Interim Management Statement on 21 May 2015 in which it noted that, "whilst sales in our home credit business have reflected a more cautious climate prior to the General Election and full FCA authorisation, weekly collections remain strong on conservative underwriting standards."

Confirmations

In accordance with Listing Rule 5.6.15G(3), the Board of Non-Standard Finance considers that this announcement contains sufficient information about Loansathome4u to provide a properly informed basis for assessing Loansathome4u's financial position.

In accordance with Listing Rule 5.6.15G(4), the Board of Non-Standard Finance confirms that Non-Standard Finance has made the necessary arrangements with Loansathome4u to enable the Company to keep the market informed without delay of any developments concerning Loansathome4u that would be required to be released were Loansathome4u part of Non-Standard Finance.

The Board of Non-Standard Finance today also confirms that until such time as a prospectus is published in relation to the proposed acquisition or discussions between the parties are terminated (or such other date as required by the UK Listing Authority), Non-Standard Finance will make any announcement that would be required in order to be compliant with its obligations under the Disclosure and Transparency Rules of the Financial Conduct Authority on developments in relation to the assets that it intends to acquire from Loansathome4u as if those assets were already part of Non-Standard Finance.

Conference call

John van Kuffeler, Chairman, and Nick Teunon, Chief Financial Officer, will host a conference call today at 2pm. Details of the conference call are as follows:

Dial-in no: [phone]

Conference ID: 5822136#

Replay (available for one week)

Dial-in no: [phone]

Conference reference number: 1281104#

An audio file will be also available on the NSF website following the conference call.

- Ends -

UBS Limited acted as financial adviser to Non-Standard Finance with Ashcombe Advisers LLP providing corporate finance advisory services to the Company.

For more information

Non-Standard Finance plc John van Kuffeler, Chairman Nick Teunon, Chief Financial Officer & Company Secretary c/o Bell Pottinger	[phone]
Bell Pottinger Olly Scott Will Bland	[phone]

http://www.nonstandardfinance.com/

IMPORTANT NOTICE:

The information contained in this announcement is not for release, publication or distribution to persons in Australia, Canada, Japan, the Republic of South Africa or the United States or in any jurisdiction where to do so would breach any applicable law. No public offer of securities is being made by virtue of this announcement.

This announcement has been prepared for the purposes of complying with the applicable law and regulation of the United Kingdom and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws and regulations of any jurisdiction outside of the United Kingdom.

This announcement may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward looking statements include all matters that are not historical facts and involve predictions. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements reflect the Group's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Group's or Loansathome4u's business, results of operations, financial position, liquidity, prospects, growth or strategies and the industry in which it operates. Forward-looking statements speak only as of the date they are made and cannot be relied upon as a guide to future performance. Save as required by law or regulation, the Company disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements in this announcement that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement.

Certain figures contained in this announcement, including Financial Information, have been subject to rounding adjustments. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this announcement may not conform exactly with the total figure given.

Except as explicitly stated, neither the content of the Group's nor Loansathome4u's website, nor any website accessible by hyperlinks on the Group's or Loansathome4u's website is incorporated in, or forms part of, this announcement.

UBS Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom.

UBS Limited is acting as financial adviser to Non-Standard Finance and no one else for the purpose of the consideration or a possible offer for Loansathome4u and will not be responsible to anyone other than Non-Standard Finance for providing the protections offered to clients of UBS Limited nor for providing advice in relation to such possible offer.

Basis of preparation

The Unaudited Carve Out Financial Information is presented in pounds sterling, which is S&U and Loansathome4u's functional and presentational currency. All values are in millions (£m) rounded to one decimal place except where otherwise indicated.

The HFI will be prepared in accordance with the requirements of the Prospectus Directive (PD) regulation, the Listing Rules, and in accordance with this basis of preparation. IFRS does not provide for the preparation of combined historical Financial Information or for the specific accounting treatment set out below, and accordingly in preparing the HFI certain accounting conventions commonly used for the preparation of historical Financial Information for inclusion in investment circulars as described in the Annexure to SIR 2000 "Standards for Investment Reporting applicable to public reporting engagements on historical Financial Information" issued by the UK Auditing Practices Board will be applied.

The Unaudited Carve Out Financial Information and the HFI are prepared on a combined basis and therefore do not comply with the requirements of IFRS 10. They have been prepared by aggregating the results, assets and liabilities of each of the divisions which make up Loansathome4u by applying the principles underlying the consolidation procedures of IFRS 10 'Consolidated Financial Statements' for each of the three years presented.

The HFI will be prepared on a going concern basis and under the historical cost convention, except for certain areas where fair value measurement is required by IFRS. The Unaudited Carve Out Financial Information and HFI are presented in pounds sterling, which is also S&U and Loansathome4u's functional currency. The functional currency of the subsidiaries is the currency of the primary economic environment in which they operate.

The following summarises the accounting and other principles applied in preparing the Carve Out Financial Information and HFI:

Revenue recognition

Interest income is recognised in the income statement for all loans and receivables measured at amortised cost using the effective interest rate method (EIR). The EIR is the rate that exactly discounts estimated future cash flows of the loan back to the present value of the advance. Acceptance fees charged to customers and any direct transaction cost are included in the calculation of the EIR. Under IAS 39 credit charges on loan products continue to accrue at the EIR on all impaired capital balances throughout the life of the agreement irrespective of the terms of the loan and whether the customer is actually being charged arrears interest. This is referred to as the gross up adjustment to revenue and is offset by a corresponding gross up adjustment to the loan loss provisioning charge to reflect the fact that this additional revenue is not collectable. Sales of goods are recognised in the income statement when the product has been supplied.

Amounts receivable from customers

All customer receivables are initially recognised at fair value (generally calculated as the amount loaned to the customer plus direct transaction costs). After initial recognition the amounts receivable from customers are subsequently measured at amortised cost. The directors assess on an ongoing basis whether there is objective evidence that a loan asset or group of loan assets is impaired and requires a deduction for impairment. A loan asset or a group of loan assets is impaired only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan. Objective evidence may include evidence that a borrower or group of borrowers is experiencing financial difficulty, default or delinquency in repayments. Impairment is then calculated by estimating the future cash flows for such impaired loans, discounting the flows to a present value using the original EIR and comparing this figure with the balance sheet carrying value. All such impairments are charged to the income statement. For all accounts which are not impaired, a further incurred but not reported provision (IBNR) is calculated and charged to the income statement based on management's estimates of the propensity of these accounts to default from conditions which existed at the balance sheet date. Key assumptions in ascertaining whether a loan asset or group of loan assets is impaired include information regarding the probability of any account going into default and information regarding the likely eventual loss including recoveries. These assumptions and assumptions for estimating future cash flows are based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. All assumptions are reviewed regularly to take account of differences between previously estimated cash flows on impaired debt and the eventual losses.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Certain freehold property is held at previous revalued amounts less accumulated depreciation as the Group has elected to use these amounts as the deemed cost as at the date of transition to IFRS under the transitional arrangements of IFRS 1. Depreciation is provided on the cost or valuation of property, plant and equipment in order to write such cost or valuation over the expected useful lives as follows;

§ Freehold Buildings 2% per annum straight line

§ Computers 20% per annum straight line

§ Fixtures and Fittings 10% per annum straight line or 20% per annum reducing balance

§ Motor Vehicles 25% per annum reducing balance

§ Freehold Land is not depreciated

Inventories

Inventories are stated at the lower of cost or net realisable value.

Taxation

Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Pensions

Pension charge represents the amount payable by the Company for the financial year to defined contribution pension schemes.

Share based payments

The Company issues share-based payments under the S&U plc 2008 Discretionary Share Option Plan and the S&U plc 2010 Long Term Incentive Plan. The cost of these share based payments is based on the fair value of options granted as required by IFRS 2. This cost is then charged to the income statement over the three year vesting period of the related share options with a corresponding credit to reserves. When any share options are exercised, the proceeds received are credited to share capital and share premium.

Leases

Rental costs under operating leases are charged to the income statement on a straight line basis.

Investments

Investments held as fixed assets are stated at cost less provision for any impairment.

Critical accounting judgements and key sources of estimation uncertainty

The key accounting judgements which the directors have made in the process of applying the Group's accounting policies and which have the most significant effect on the amounts recognised in the financial statements are the judgements relating to revenue recognition and impairment. The Directors consider that there are no key sources of estimation uncertainty other than those inherent in the consumer credit market in which we operate.

Description of key line items in the income statement

Revenue

Revenue represents interest income on loans and receivables together with income from the sale of goods to customers.

Cost of sales

Cost of sales represents commissions payable on collections of amounts due from customers, loan loss provisions and the cost of goods sold to customers.

Administrative expenses

Administrative expenses include but are not limited to administrative staff costs, leases for office space, utility costs, IT costs, depreciation and professional fees.

Finance income

Loansathome4u is being acquired net of cash/borrowings so there is no historical finance income to present.

Taxation

Tax comprises current tax as well as the changes in provisions for deferred tax.

Unaudited Carve Out Financial Information

Results of operations

The following table sets out selected income statement data for the 3 years end 31 January 2015.

Income Statement	31 Jan 13	31 Jan 14	31 Jan 15
	£,000	£,000	£,000
Revenue	34,087	34,597	38,298
Cost of Sales	(9,509)	(9,797)	(10,996)
Gross Profit	24,578	24,800	27,302
Administrative Expenses	(16,669)	(17,037)	(18,893)
Operating Profit	7,909	7,763	8,409
Finance Income	-	-	-
Profit before taxation	7,909	7,763	8,409
Taxation	(1,924)	(1,798)	(1,789)
Profit for the year attributable to equity holders	5,985	5,964	6,620

Balance sheet

The following table sets out the balance sheets for the 3 years ended 31 January 2015.

Balance Sheet	31 Jan 13	31 Jan 14	31 Jan 15
	£,000	£,000	£,000
Non current assets
Property Plant and Equipment	1,357	1,412	1,438
Amounts receivable from customers	246	234	185
	1,603	1,646	1,623
Current assets
Inventory	115	136	59
Amounts receivable from customers	33,249	33,808	34,437
Trade and Other Receivables	167	259	230
Inter-company Receivables	13,172	14,309	16,284
	33,531	34,203	34,726
Total assets	48,306	50,158	52,633
Current liabilities
Trade and other payables	(1,030)	(1,234)	(1,383)
Current tax liabilities	(1,047)	(1,144)	(1,097)
Accruals and deferred income	(264)	(521)	(608)
	(2,341)	(2,899)	(3,088)
Non current liabilities
Deferred tax liabilities	(103)	(134)	(126)
	(103)	(134)	(126)
Total liabilities	(2,444)	(3,033)	(3,214)
NET ASSETS	45,862	47,125	49,419
ACQUIRED NET ASSETS	32,690	32,816	33,135

Cash flow

Cash Flow Statement	31 Jan 13	31 Jan 14	31 Jan 15
	£,000	£,000	£,000
Net cash inflow from operating activities	7,717	6,345	6,782
Proceeds on disposal of fixed assets	48	33	34
Purchases of property plant and equipment	(625)	(540)	(519)
Net cash used in investing activities	(577)	(507)	(485)
Cash remitted to parent/other group companies	(7,140)	(5,838)	(6,297)
Issue of new shares	0	0	0
Receipt of new borrowings	0	0	0
Repayment of borrowings	0	0	0
Net decrease/increase in overdraft	0	0	0
Net cash used in financing activities	(7,140)	(5,838)	(6,297)
Net increase/decrease in cash and cash equivalents	0	0	0
Cash and cash equivalents at beginning of year	0	0	0
Cash and cash in bank	0	0	0

 

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