Provident urges Shareholders to take no action in respect of NSF’s Offer
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION
FOR IMMEDIATE RELEASE
16 April 2019
Provident Financial plc (“Provident”)
Provident urges Shareholders to take no action in respect of NSF’s Offer
Section 1: Chairman's letter to Provident Shareholders
I am taking the unusual step of writing to you directly as part of today’s announcement to share with you my personal views on the situation that Provident finds itself in.
Since the Offer from NSF was announced, I have considered it our duty to ensure that shareholders have all the essential information that they need to make an informed and considered assessment of what they should do.
On 23 March, we published our response document which outlined our considerable concerns with the Offer and we followed this up with a further statement on 2 April which posed important questions to NSF, to which the Provident Board and I felt strongly you should have answers.
While many of the questions put to NSF remain substantially unanswered, NSF finally acknowledged one of our questions last Friday evening and confirmed that certain of their dividends since 2015 have been in contravention of the Companies Act. They were described by NSF as “technical infringements” but the simple fact and truth of the matter is that they were unlawful. These unlawful distributions are a telling indictment of the competency of the NSF team and the weak oversight of their board and must call into question their ability to run a business some seven times larger than their own and one which includes a regulated bank.
While NSF may now have accepted these failures under the Companies Act, through either indifference or arrogance or because they do not have the answers, they have failed to provide a comprehensive response to our other critical questions. I find this silence telling, particularly when it relates to straightforward questions regarding the future management of Vanquis Bank (which would be the largest business within the Enlarged Group), the implications of selling Moneybarn on the broader Provident Group or the genuine challenges of addressing the concerns for the CMA. On this latter point, NSF’s failure to make progress with their CMA submission creates further disruption for the business and yet more uncertainty for our shareholders.
At this point, there is no new revelation about this deal; it is still the same dreadful deal that it was on day one. It is more of a coup d’état than a hostile takeover, spearheaded by a management team at NSF with a track record of value destructive acquisitions and facilitated by two powerful shareholders. These shareholders already together own about 54 per cent. of NSF, a business which has singularly failed to deliver pre-tax profits since the IPO and in which period its share price is down 48%. This coup d’état may inflict a cost to shareholders of as much as £40 million in transaction fees alone, and that’s before you take into account the other significant potential value-destroying elements of the deal.
I have now been Chairman of Provident for six months and the majority of my board have served for less than a year. I joined the board because I felt I could give support and assistance to the management team which had already made good progress with the turn-around of the business in 2018, seeking to address the poor delivery of the business in prior years which had led to regulatory and financial issues. We fully acknowledge those issues and this poor historical performance and our responsibility to deliver value and returns for you, our shareholders, but a flawed and risky transaction is the wrong way to proceed. I am confident that we have the right strategy and team in place to fulfil the value potential of Provident for our shareholders.
The Chief Executive should be congratulated for the achievements of last year; the strengthening of the balance sheet by the rights issue in April secured the future of the group and over the following 8 months the business delivered significant improvements in performance, governance and our regulatory position. This was done at a time of great uncertainty and with the management and Board in transition.
Our sector is one that quite rightly is the focus of considerable external attention from regulators and politicians. We have learned that good governance, adherence to regulatory best practice and putting the customer at the forefront, are absolutely fundamental to our ongoing success. These principles are non-negotiable. The cost of not complying has been clearly demonstrated in the past and shareholders should be very concerned about any suggestion of compromise in these critical areas.
The direction of travel for the whole industry is now quite clear. Good outcomes for customers, with sustainable and attractive returns to shareholders but not at the level that they have historically enjoyed, is the reality of the way forward. Our trading announcement in January should have been a wake-up call as to the future profitability of the whole industry, as much as it related to our bank specifically.
From the outset, the board of NSF have claimed significant advantages over the current Provident Board and management. Early on they suggested that their superior regulatory relationships would somehow enable them to release capital, that they would sell Moneybarn, a profitable core business with major interconnections with our broader funding and credit ratings, again releasing capital for return to shareholders, whilst ignoring the financial reality of the importance of the business to the balance sheet from a profit and security point of view.
NSF has focused on home credit which, although core for them, relatively is less significant for us with the majority of our profits coming from Vanquis Bank. Herein lies the challenge for NSF: there are strong regulatory headwinds in the guarantor loans business and we believe that the future of Loans At Home as an independent business – with its limited scale, negative net assets, agency model and largely new and unknown management team - is highly questionable. These challenges have not been answered. In addition, NSF have repeatedly delivered pre-tax losses – a performance which would be mitigated by Provident's current profitability and I believe it is likely that using Provident's relative financial strength is a key factor in motivating this unsolicited offer.
Shareholder, this is a poorly thought out transaction. We see no benefit to those invested in Provident who do not have a similar holding in NSF. The Offer is fraught with risk for all Provident Shareholders. Now that the Panel has frozen the timetable, NSF may either do the right thing and let the CMA process play out during the Offer or alternatively decide to waive the CMA condition. If it does the latter and succeeds in acquiring Provident, then you, as shareholders, would be invested in a group with no clarity as to whether the CMA will approve the transaction (and if so at what cost) or seek to unwind it. Either way, we believe this could result in a significant cost for Provident Shareholders.
I strongly recommend you to get behind our Board and management team and reject this dreadful and opportunistic transaction. Provident can generate far greater value for you as shareholders through delivering on its current strategy and fulfilling its potential than it could through a destabilising, hostile transaction which suffers from major strategic and financial flaws, has significant operational and execution risks and where the counterparty’s financial controls have recently been found wanting. This is simply not a transaction that is in the interests of Provident Shareholders.
Provident Financial plc
Section 2: Further Provident Board Assessment of the Offer
The Provident Board is astonished by NSF's after-hours announcement on Friday 12 April 2019 admitting, ten days after Provident questioned certain dividends and buy backs, a wide range of unlawful distributions, and seeking to brush them away as 'technical infringements' that do not affect anything. The fact that NSF is only now saying it is taking steps to "further enhance its procedures for the making of future distributions and to further strengthen its financial procedures, systems and controls" speaks for itself.
The NSF announcement also begs the important question of whether NSF will provide full information about 'certain other' contraventions in relation to dividends and buy backs it has identified to enable Provident Shareholders who currently are not exposed to NSF to reach a fully informed view about NSF's governance and controls and a fully informed decision about the Offer.
The Provident Board believes this raises yet further questions about the suitability and competence of NSF to acquire and manage Provident's much larger, more complex and dual-regulated business, and in particular Vanquis Bank.
In its announcements of 2 April 2019 and 12 April 2019, in addition to bringing to light concerns about NSF's dividends and buy backs, Provident raised a number of key questions in relation to the Offer on which it required a response from NSF, so as to ensure that all of its shareholders have full clarity with respect to the terms and implications of the NSF Offer. NSF continues to be either unable or unwilling to address these other fundamental questions raised by Provident, which the Provident Board believes could have a material impact on future shareholder value.
(1)The CMA approval is uncertain, and any remedy will be un-costed. What does this mean for Provident Shareholders?
- Almost eight weeks have passed since NSF announced its firm intention to make an offer for Provident and, as of 15 April 2019, NSF has still not commenced the formal CMA review of the Offer. As a result, there was no realistic prospect of the formal CMA review being completed prior to 8 May 2019, being the First Closing Date, or 29 May 2019, the last day on which, under the original Code timetable, the Offer would have been required to be declared unconditional in all respects.
- The Provident Board welcomes the freeze of the Code timetable announced by the Panel on 15 April 2019. NSF now may choose to close the Offer after the CMA publishes its Phase 1 decision, which would give Provident Shareholders the opportunity to make a fully informed decision whether to accept the Offer. The Provident Board believe this would be the fair and appropriate thing for NSF to do. If the CMA refer the Offer for a Phase 2 review before the Offer is declared unconditional as to acceptances the Offer will lapse in accordance with its terms and the Code.
- However, notwithstanding the freeze, NSF may choose to declare the Offer unconditional as to acceptances earlier and waive the CMA condition in order to complete the Offer before the CMA decision or even after the CMA has referred the Offer for a Phase 2 review (provided the Offer was unconditional as to acceptances beforehand). This would further increase the risk of value destruction for Provident Shareholders as the Offer would likely complete before resolution of, and clarity regarding any remedy resulting from the CMA process:
- NSF has failed to provide Provident Shareholders with sufficient information and comfort as to Loans at Home's viability and sustainability on a standalone basis and what it might cost the Enlarged Group to establish Loans at Home with a robust capital position (Loans at Home had net liabilities of negative £12.9 million as at 31 December 2018) and appropriate funding at the outset. The implications here are two-fold. Firstly, there is a risk that the CMA will not be sufficiently confident about the adequacy of the proposed demerger as a means of maintaining competition in the home credit segment of the market. Secondly, the costs and value consequences of a demerger, even if accepted by the CMA, would be borne in large part by Provident Shareholders given their shareholding in the Enlarged Group.
- NSF may choose to change its strategy and propose the disposal of Loans at Home to a third party. This poses similar concerns. The timing, proceeds and costs of a disposal and fundamentally the availability of a buyer who would be acceptable to the CMA are all unknown.
- Consequently, there are potential serious consequences which Provident Shareholders should be aware of:
- If the Offer is 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.
- If the CMA does not find the final proposed remedy adequate, there is the additional risk that the combination of Provident and NSF would be referred 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.
- The lack of information in these critical respects means Provident Shareholders' are unable to make a fully informed decision about the Offer.
(2) NSF has not delivered value for its shareholders to date, so why would it be any different for Provident Shareholders now?
NSF already has a weak track record:
- Since incorporation, NSF has been an unprofitable business, largely under the same management team, with a track record of repeated statutory pre-tax losses;
- NSF's share price has fallen 48 per cent. since its IPO in 2015;
- NSF's share price has fallen 9 per cent. since the announcement of its offer for Provident on 22 February 2019; and
- Based on the latest NSF share price, the terms of the Offer remain highly unattractive, valuing each Provident share at 448 pence, a 13.3 per cent. and 12.4 per cent. discount, respectively, to the latest Provident share price and the Provident share price immediately prior to NSF's Rule 2.7 announcement.
In addition, the Provident Board notes that:
- NSF has stated in its Offer that it will have the right to reduce the number of new NSF Shares that Provident Shareholders will receive by the amount of any dividend (or other distribution) which is declared, paid or made by Provident (including the final dividend of 10 pence which Provident has since declared in respect of the 2018 financial year), on a basis to be determined by NSF; and
- If this adjustment were to be made in full, it would reduce the value of the Offer by a further 10 pence to 438 pence, such that the discount to the latest Provident share price and that prior to the announcement of NSF's Rule 2.7 announcement would increase to 15.2 per cent. and 14.4 per cent., respectively.
The Board believes that NSF's share price performance under the leadership of the NSF management team speaks volumes about the NSF's business, its management team, strategy and outlook.
On the basis of these facts alone, the Provident Board strongly believes that NSF's Offer for Provident is likely to lead to significant destruction of value for Provident Shareholders, and in particular, for those Provident Shareholders who do not hold shares in NSF. This sentiment is amplified by the fact that thus far, NSF has engaged in acquisitions which have been much smaller than Provident, and the Provident Board believes that the disparity of size between NSF and Provident further exacerbates the execution risks.
(3) NSF has not addressed the material outstanding questions in relation to the Offer as set out in Provident's announcement on 2 April 2019, so why should Provident Shareholders believe that the NSF management team has clear answers?
The Provident Board is concerned by NSF's failure to address the straightforward questions posed and believes this suggests a disregard for Provident Shareholders’ entitlement to full and complete information in relation to the Offer.
As a reminder, these questions focused on:
- NSF's proposed sale of Moneybarn and a lack of clarity on how NSF intends to address the potential funding, ratings, balance sheet, and earnings impacts resulting from the proposed sale, whilst still purporting to achieve a meaningful capital distribution;
- The future management of Vanquis Bank under NSF leadership, given it is Provident's largest asset and a PRA and FCA regulated bank;
- NSF's failure to explain how and when it expects to achieve CMA approval of the transaction; and
- The absence of any published strategy to address 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 businesses.
(4) NSF's unwelcome Offer raises material regulatory concerns
- The Offer is conditional on clearance from Provident's financial regulators, the FCA, PRA and CBI. These important consents do not appear to have been received as yet and NSF has not updated Provident Shareholders as to when these might be received. This creates yet another limb of uncertainty to which Provident Shareholders are exposed.
- The Provident Board notes that the regulatory regime for dual-regulated firms, such as Provident, is materially different from, and imposes more exacting standards than, that of smaller non-bank financial institutions such as NSF. As such, the Provident Board continues to query, without any explanation from NSF, how NSF intends to navigate the regulatory environment that will govern the Enlarged Group, and who will lead the Vanquis Bank management team.
- Furthermore, NSF has not explained the financial impacts of combining the businesses under a dual-regulated regime to Provident Shareholders, including the consequences for the consolidated regulatory capital requirement of the Enlarged Group. NSF appears to expect Provident Shareholders to accept the Offer without understanding the capital and profitability impacts to them of the proposed transaction and the potential effect on future dividends.
(5) Provident has a strategy to deliver material shareholder value on a standalone basis
The Provident Board believes it has a clear plan to maximise value for all Provident Shareholders by executing its strategy to deliver sustainable and attractive growth and returns through its complementary, synergistic and industry leading businesses. The Provident Group has made substantial progress over the past 18 months, delivering against its 2018 objectives, including declaring a nominal dividend of 10p per share consistent with Provident's commitment made at the time of its rights issue. This is evidence of the strong momentum within the business and also underpins the Provident Board’s confidence in its objective of delivering attractive and sustainable returns to Provident Shareholders.
Provident is now at a critical point in its turnaround, and believes the Offer, in addition to being value destructive per se, poses a significant risk of derailing the substantial progress made to date. In particular, Provident has set out a clear financial framework, consistent with its customer and shareholder objectives, which it is on track to deliver over the medium term including:
- Approximately 10 per cent. return on assets;
- Sustained receivables growth of 5-10 per cent. per annum;
- Dividend cover ratio of at least 1.4x; and
- Maintaining an appropriate buffer of at least £50 million above its regulatory capital requirement, which is currently 25.5 per cent.
The Provident Board continues to have very material concerns about the strategic, operational and financial merits of the Offer, and re-confirms that it does not recommend the Offer. The Provident Board strongly advises all Provident Shareholders to take no action in relation to the risky and flawed NSF Offer.
Sources and Bases
Capitalised terms used in this document shall have the same meanings given to them in the response document published by Provident on 23 March 2019.
Unless otherwise stated in this document:
- The assertion that approximately 54 per cent. of NSF's shares are held by Invesco Asset Management and Woodford Investment Management is by reference to the Opening Position Disclosure Form 8.3 Announcements published on 25 February 2019 and 11 April 2019, with positions stated as at 22 February 2019 and 10 April 2019 respectively.
- The assertion that the NSF share price has fallen 48 per cent. since its IPO in 2015 is calculated by reference to its Closing Price on 15 April 2019 of 52.4 pence and the NSF IPO placing price of 100 pence.
- The assertion that the NSF share price has fallen 9 per cent. since the announcement of its offer for Provident on 22 February 2019 is calculated by reference to (i) the NSF Closing Price on 15 April 2019 of 52.4 pence and (ii) the NSF Closing Price on 21 February 2019 (being the last Business Day prior to NSF’s Rule 2.7 announcement) of 58 pence.
- The value of the Offer for each Provident share of 448 pence is calculated using the NSF Closing Price on 15 April 2019 of 52.4 pence, less the NSF declared final dividend of 2 pence in respect of the year ended 31 December 2018 which Provident Shareholders would not receive under the terms of the Offer, multiplied by 8.88, which is the exchange ratio of new NSF Shares for each Provident Share stated in the NSF Offer Document.
- The assertion that the Offer valuing each Provident share at 448 pence results in a 13.3 per cent. and 12.4 per cent. discount respectively to the latest Provident share price and the Provident share price immediately prior to NSF’s Rule 2.7 announcement is calculated by reference to (i) the Provident Closing Price on 15 April 2019 of 516 pence, and (ii) the Provident Closing Price on 21 February 2019 of 511 pence.
- It is noted that NSF has stated as part of its Offer that it will have the right to reduce the number of new NSF Shares that Provident Shareholders would receive by the amount of any dividend (or other distribution) which is declared, paid or made by Provident to Provident Shareholders, on a basis to be determined by NSF. If this adjustment were made in full, it would reduce the value of the Offer for each Provident share by 10 pence (being Provident’s declared final dividend in respect of the 2018 financial year) to 438 pence. Following this adjustment, the assertion that the Offer results in a 15.2 per cent. and 14.4 per cent. discount respectively to the latest Provident share price and the Provident share price immediately prior to NSF’s Rule 2.7 announcement is calculated by reference to (i) the Provident Closing Price on 15 April 2019 of 516 pence, and (ii) the Provident Closing Price on 21 February 2019 of 511 pence.
Provident, Tel: +44 12 7435 1135
Patrick Snowball, Chairman
Malcolm Le May, Chief Executive Officer
Gary Thompson / Vicki Turner, Investor Relations, Tel: +44 12 7435 1900
Richard King, Media, Tel: +44 20 3620 3073
Barclays (Joint Lead Financial Adviser and Corporate Broker to Provident)
Richard Taylor, Tel: +44 20 7623 2323
J.P. Morgan Cazenove (Joint Lead Financial Adviser and Corporate Broker to Provident)
Ed Byers, Tel: +44 20 7742 4000
Jefferies (Financial Adviser to Provident)
Graham Davidson, Tel:+44 20 7029 8000
Brunswick (PR Adviser to Provident)
Nick Cosgrove, Tel: +44 20 7404 5959
Barclays Bank PLC, acting through its Investment Bank (“Barclays”), which is authorised by the Prudential Regulation Authority (the "PRA") and regulated in the United Kingdom by the Financial Conduct Authority (the "FCA") and the PRA, is acting exclusively as corporate broker and financial adviser for Provident and no one else and will not be responsible to anyone other than Provident for providing the protections afforded to clients of Barclays nor for providing advice in relation to any matter referred to in this announcement.
J.P. Morgan Securities plc, which conducts its UK investment banking business as J.P. Morgan Cazenove, is authorised by the PRA and regulated by the FCA and the PRA in the United Kingdom. J.P. Morgan Cazenove is acting exclusively as corporate broker and financial adviser to Provident and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters set out in this announcement and will not be responsible to anyone other than Provident for providing the protections afforded to clients of J.P. Morgan Cazenove or its affiliates, or for providing advice in relation to the contents of this announcement or any other matter referred to herein.
Jefferies International Limited ("Jefferies"), which is authorised and regulated in the United Kingdom by the FCA, is acting for Provident and no one else in connection with the matters set out in this announcement. In connection with such matters, Jefferies will not regard any other person as their client, and will not be responsible to anyone other than Provident for providing the protections afforded to clients of Jefferies or for providing advice in relation to the contents of this announcement or any other matter referred to herein. Neither Jefferies nor any of its subsidiaries, affiliates or branches owes or accepts any duty, liability or responsibility whatsoever (whether direct, indirect, consequential, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Jefferies in connection with this announcement, any statement contained herein or otherwise.
Forward looking statements
This announcement may contain certain "forward looking statements" regarding the financial position, business strategy or plans for future operations of Provident. All statements other than statements of historical fact included in this document may be forward looking statements. Forward looking statements also often use words such as "believe", "expect", "estimate", "intend", "anticipate" and words of a similar meaning. By their nature, forward looking statements involve risk and uncertainty that could cause actual results to differ materially from those suggested by them. Much of the risk and uncertainty relates to factors that are beyond Provident's ability to control or estimate precisely, such as future market conditions and the behaviours of other market participants, and therefore undue reliance should not be placed on such statements which speak only as at the date of this document. Provident does not assume any obligation to, and does not intend to, revise or update these forward looking statements, except as required pursuant to applicable law or regulation.
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