Provident Financial PLC (LON:PFG) The Provident Board notes the announcement from NSF on 29 April, which it believes falls far short of providing satisfactory responses to shareholders and yet again demonstrates a disregard for Provident shareholder value. NSF’s announcement does nothing to allay the Provident Board’s significant concerns around the strategic, operational and financial merits of the Offer. The Board continues to believe that the Offer undervalues Provident and that NSF’s plans for the business could also result in material value destruction for Provident Shareholders. In addition, the Board continues to question the suitability and competence of the NSF management team, which has overseen unlawful distributions, to run Provident’s much larger, more complex and dual-regulated business, in particular Vanquis Bank.
The Provident Board would like to draw the attention of Provident Shareholders to the following highly concerning elements of NSF’s latest announcement:
1. NSF’s revised timetable leaves Provident Shareholders exposed to a potential blind and uncosted remedy from the Competition and Markets Authority (“CMA”)
The Provident Board notes that NSF has elected to set 15 May 2019 as the revised closing date of the Offer and the last date on which the Offer can be declared unconditional as to acceptances. NSF has still not managed to commence the formal CMA review of the Offer and consequently cannot expect a decision by the CMA for at least a further two months. The freeze of the Takeover Code timetable announced by the Panel on 15 April 2019 allowed NSF to declare its Offer unconditional as to acceptances after the Phase 1 decision, which would have given Provident Shareholders the opportunity to make a fully informed decision about whether to accept the Offer. NSF has instead stated its intention for the Offer to be declared wholly unconditional by 5 June 2019, and in order to achieve this, the Provident Board believes NSF would need to waive the CMA condition without knowing if or with what remedies the combination would be approved. Provident Shareholders will therefore be denied the opportunity to make a fully informed assessment of the Offer and as previously announced there are potential serious consequences which Provident Shareholders should be aware of:
i. if the Offer were completed without CMA approval, the Provident and NSF groups would be required to be held separate under independent management for a potentially prolonged period under the CMA’s Initial Enforcement Order (IEO) of 22 February 2019. In that time, while the two groups are operated separately, shareholders would not receive any synergy benefits supposedly offered by the acquisition;
ii. there is the additional and very real risk that the CMA will not find the proposed remedy adequate and consequently refer the combination of Provident and NSF to a Phase 2 review by the CMA lasting six months or more and ultimately if not approved by the CMA the risk that the combination would have to be unwound, incurring further value destruction for Provident Shareholders; and
iii. the costs and destruction of value arising from the businesses being held separate and the combination potentially unwound would be borne in largest part by Provident Shareholders, given that they would together hold some 88 per cent. of the issued share capital of the Enlarged Group.
2. NSF has not provided satisfactory answers to Provident’s questions in relation to its Offer
The responses from NSF to Provident’s questions in relation to its Offer are inadequate and come a full 27 days after these questions were first put forward on 2 April 2019, which suggests either that the NSF management team does not have sufficient answers, or that it is unwilling to provide them with sufficient detail such that Provident Shareholders can make a fully informed and considered assessment of the Offer. Given the inadequacy of its response to these straightforward questions, NSF is not addressing the needs of those Provident Shareholders who, holding some 49 per cent. of Provident’s shares, have not assented their shares to the Offer.
In response to the specific points raised within NSF’s announcement:
· NSF has yet again failed to provide a sufficient explanation as to the viability of Loans at Home as a standalone business and the potentially material cost to Provident Shareholders of establishing Loans at Home at the outset with a robust capital and funding position as a demerged entity, given that NSF claims it will be listed debt free on the London Stock Exchange. Provident further has concerns about the current carrying value of Loans at Home in the NSF balance sheet, and the Provident Board does not see why Provident Shareholders should bear the cost of any write down;
· NSF has further qualified its claims that a disposal of Moneybarn may generate proceeds for a meaningful capital distribution;
· NSF continues to be committed to a closure or sale of Satsuma, but has not articulated any detail around its own digital strategy. The Provident Board considers digital to be at the heart of the future development of the non-standard lending market and therefore integral to the future strategy of Provident. Moreover, the costs of any closure or sale have not been detailed by NSF;
· NSF has still not provided clarity about its intended executive management team for Vanquis Bank, which, as Provident’s largest asset with 1.8 million customers, is a critical driver of future value. It is also a PRA and FCA regulated bank – a distinct regulatory structure with which the NSF management has limited experience; and
· NSF’s statements around its approach to addressing the regulatory issues highlighted in the FCA letter dated 6 March 2019 and the impact of recent regulatory statements on the future profitability of NSF’s guarantor loans business appear to be superficial at best. The Provident Board believes that shareholders should be cautious around the economic performance of the guarantor loans product going forward and therefore the value of the guarantor loans businesses within NSF.
3. Offer undervalues Provident
· Based on the terms of the Offer of 8.88 NSF shares for each Provident Share (with both NSF and Provident’s share prices adjusted for their respective announced dividends), the implied value per Provident Share is 453 pence, a 13.1 per cent. discount to Provident’s closing price as at 30 April 2019;
· The NSF shares have declined by 8.0 per cent. since the announcement of the Offer on 22 February 2019; and
· The most recent closing price for NSF’s shares prior to this announcement was 53 pence, a 47.0 per cent. discount to the NSF IPO price.
4. NSF’s unlawful dividend payments and share buy-backs since the NSF IPO
Provident notes that NSF has dedicated a significant proportion of its AGM notice to rectify historic unlawful dividend payments and share buy-backs, which demonstrated a failure in NSF’s governance practices as a listed company. For further information on this, please see the RNS issued today called “NSF seeks to rectify its unlawful shareholder distributions and share buy-backs”.
NSF’s announcement on 29 April 2019 has done nothing to change the Provident Board’s view that the Offer has material strategic, operational and financial flaws and NSF’s future plans are fraught with execution risk. The Provident Board re-confirms that it does not recommend the Offer and strongly advises all Provident Shareholders to take no action.