# Arbuthnot Banking Group Analyst Q&A: Strong funding and capital position give it a competitive advantage (LON:ARBB)

- Link: https://www.directorstalkinterviews.com/arbuthnot-banking-group-analyst-qa-strong-funding-and-capital-position-give-it-a-competitive-advantage-lonarbb/412949171
- Published: 2020-12-18T08:29:13+00:00
- Author: Amilia Stone

**[Arbuthnot Banking Group plc](https://www.directorstalkinterviews.com/company/arbuthnot-banking-group-plc/arbb.l)**(
LON:ARBB) is the topic of conversation when **Hardman and Co**’s Analyst Mark Thomas
caught up with DirectorsTalk for an exclusive interview.

**Q1: Arbuthnot Banking Group recently announced the acquisition of Asset Alliance.
What can you tell us about that deal?**

**A1: **We have long argued that ABG’s strong funding and capital position give 
it a competitive advantage in doing cheap deals in uncertain markets.

On 10 December 2020, ABG announced the acquisition of Asset Alliance (AA), a vehicle
finance and related services provider, predominantly in the truck & trailer and 
bus & coach markets. The expected consideration is £4.1m, against an NAV of £8.1m(
with acquisition adjustments, the expected negative goodwill (an equity uplift) 
is £1.7m). AA has leases with a net book value of ca.£150m. ABG expects 2021 EBITDA
of £5.5m, and with lower-cost refinancing, we expect bottom-line profitability.

**Q2: What does the deal tell us about the company strategically?**

**A2: **For us, the important point about this deal is not the deal itself but, 
rather, what it says about the opportunities for a well-funded and capitalised bank
like ABG. We expect a number of non-retail-deposit financing businesses to face 
increasing funding challenges through any downturn. With increasing arrears and 
bad debts, their profitability is likely to be sharply lower, and their capacity
to lend into any recovery becomes minimal, if any. A backer such as ABG sees material
refinancing advantages, and also enables a much faster growth rate in any recovery.
Asset Alliance would have faced big losses as a standalone business, but it is likely
to be profitable under ABG’s ownership.

**Q3: What were the deal terms?**

**A3: **The consideration is based on an agreed discount to the tangible net assets
of AA at completion, after adjusting for the fair value of the assets available 
for lease and is to be £4.1m. After the usual accounting adjustments that will generate
negative goodwill of £1.7m so ABG generates equity because it is buying assets at
a discount.

AA is expected to report EBITDA of around £5.5m in 2021, which is in line with what
it delivered in 2018. However, because under ABG’s ownership it can be funded by
cheap retail deposits, we are expecting a profit of around a £1m when in 2018 AA
reported a loss. There will be acquisition costs of £0.8m taken this year but you
are looking at a business bought on discount generating around a million of profit
for a consideration of £4.1m. As I mentioned earlier, Arbuthnot will be able to 
fund much faster growth than AA could have done alone.

**Q4: What is the business it bought?**

**A4: **AA provides vehicle finance and related services, predominantly in the truck&
trailer and bus & coach markets. Operating from five locations, it is the UK’s leading
independent end-to-end specialist in commercial vehicle financing, and it has over
4,000 vehicles under management. As at 31 August 2020, AA had assets for lease with
a net book value of ca.£150m. We understand that the significant majority of the
business is truck & trailer (it is also a broker for coach lending).

**Q5: And do you expect Arbuthnot Banking Group to do more deals like this?**

**A5: **Yes. It has the capital and funding to do several more deals like this. 
Unusually for a quoted company, such deals will add value because i) the sellers
are in reality distressed and ii) ABG’s cheap funding brings something to the party
as unprofitable stand-alone businesses can be made profitable under its ownership.

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