Views on takeover bids

Motor Trade Finances Ltd (MTF) has issued a statement to the NZX to summarise the board’s consideration of matters relevant to the Turners Finance Ltd offer and inform its shareholders of Heartland NZ’s latest takeover bid. Chairman Stephen Higgs says the Turners off is the most urgent with its last date of acceptance being October 17. “If ordinary shareholders are considering accepting the offer, we urge you to give careful consideration to all matters relevant to your decision,” says Higgs. “The board recognises ordinary shareholders’ circumstances vary and suggests you seek advice from an appropriately qualified professional adviser if in doubt as to any aspect of Turners’ offer or the proposal from Heartland discussed below.”

THE OFFER MADE BY TURNERS

MTF informed shareholders on September 15 regarding Turners’ offer of $1.15 per ordinary share and that is seeking to acquire up to 20 per cent of MTF’s ordinary shares. As set out in a letter to ordinary shareholders on September 21, Higgs says the following situation exists in regard to the Turners offer: • Turners has been a shareholder of MTF since 2004 and currently provides about 10 20 per cent of MTF’s monthly sales volume. • Turners and its parent company operate in the financial services market with interests in motor-vehicle finance with Dorchester Finance and Oxford Finance, motor-vehicle insurance with Mainstream and debt management via EC Credit. • Turners currently holds less shares than it is required to hold under its originator obligations to reflect its growing loan book. Accordingly, the board welcomes Turners’ interest in acquiring more shares to meet its obligations under its originator agreement – currently less than five 20 per cent. • If Turners receives acceptances representing 10 20 per cent or less of MTF shares, the transfer of shares must be registered by the Board. • If Turners receives acceptances which, if registered, would cause it to hold greater than 10 per cent, the approval of both the board and a special resolution of ordinary shareholders at a meeting is required before those shares can be held by Turners. • MTF’s board notes Turners is considering making offers to take over run-off ledgers from non-originating shareholders. As Turners noted in its letter to shareholders dated October 9, the MTF board will not agree to such transfers as part of Turners’ current unsolicited cash offer. “The board is yet to form a view on the merits of Turners owning more than 10 per cent of the voting shares or in regard to Turners’ suggestion of accepting constraints on the voting rights of ordinary shares in excess of 10 per cent,” says Higgs. “We will communicate further on this issue should the acceptances received by Turners take it above the 10 per cent limit.”

Board’s view of ordinary shares’ value

“We undertook to write to you again regarding our view on the value being presented by Turners’ offer,” says Higgs in his statement. “Since that letter, the board of MTF, having taken advice, has formed a view on a fair value range for MTF ordinary shares and believes the Turners’ offer is materially below that range. “The board believes a fair value range for MTF ordinary shares – where the acquisition does not allow the acquirer to control MTF – is $1.39 to $1.71 per share.” The board’s view takes into account a number of factors, but primarily reflects the following: • The board expects to pay a final dividend in regard to the 2015 financial year of seven cents per ordinary share – most likely to be paid in November. This will bring the total for the 2015 financial year to 13 cents per ordinary share. • This is in line with a policy of paying around 50 per cent of MTF’s underlying profit after tax by way of dividend. • Subject to normal prudential concerns, the board expects to continue this policy in the near term. • While the future cannot be predicted with certainty, the board currently expects to grow underlying profit over the coming years. As such we expect the absolute level of dividend will increase over time in line with profit. “Accordingly, we note Turners’ unconditional offer of $1.15 per ordinary share is below the bottom of our valuation range,” says Higgs. “However, the board notes the Turners offer is higher than the range in which MTF ordinary shares have been trading over the past 12 months. “The majority of trades over that period have been in the range from 90 cents to $1 per share. In the absence of any other unconditional offers being likely, the Turners’ offer does present an opportunity for dry shareholders, who no longer originate loans with MTF and who are looking to sell MTF shares in a timely manner at a price that hasn’t been attainable since the ordinary shares were issued in 2009. “Similarly, in the absence of any other unconditional offer being likely, originating shareholders who hold excess shares – relative to their requirements under their originator agreement – may see value in the opportunity to sell shares into the Turners offer.

Possible takeover offer from Heartland

In response to Turners’ offer, MTF’s board and ordinary shareholders received a letter dated September 18 from Heartland NZ expressing interest in making a full takeover offer for MTF. “Yesterday, Heartland sent us a further letter confirming it remains interested in pursuing a full takeover offer for MTF and states it would be likely to offer more than $1.50 per share if it did so,” says Higgs. “However, making such an offer would be subject to a significant due diligence process. “Given the conditionality of Heartland’s interest in MTF, the board is not currently able to provide any assurance or advice regarding whether a full takeover offer from Heartland, or any other party, will be forthcoming, what price any offer might involve or whether other terms of any proposal would be acceptable – especially in regard to protecting commission levels enjoyed by MTF dealers and franchisees. “We cannot see the period of time for resolving these issues being less than four weeks and it is far from certain any offer would arise at the end of that period. Given this uncertainty, the current possibility of such an offer being made does not provide sufficient cause for the board to advise shareholders who otherwise might accept the Turners offer to not do so. “Should Heartland present a full takeover offer following its due diligence process, the board will respond to that in accordance with its legal obligations, including informing shareholders of the merits of the offer.” Higgs says there are three other important points to note in regard to any future full takeover offer that might arise: • Unless acceptances in excess of 90 per cent were received, allowing the offeror to compulsorily acquire the outstanding shares, the offer would lapse without any shareholder being able to sell their shares into the offer – unless the offeror chose to waive the 90 per cent minimum acceptance condition. • To the extent that commission payments received by originating shareholders are greater than payments originators might receive from a competing finance provider – in that they are “above market” – this above-market element may be at risk in the event of a successful takeover offer as control of MTF changes and the new owner may seek to maximise returns to equity by reducing commissions. Accordingly, there is a value to originating shareholders’ control of MTF – and thereby control of the equity/commission structure – that is not recognised in the value of a dry ordinary share. A future takeover offer may look to preserve current arrangements or compensate originators for changes the acquirer wishes to make to the commission structure. Originators should be aware that, in the latter event, they would likely receive a value per share significantly greater than our valuation of a dry share. Presently, the board has not received any indication from any party that an unconditional offer, which includes the significant premium that would be required to compensate originators for changes to the commission structure and loss of control, is likely. • The approval of both the board and a special resolution of ordinary shareholders at a meeting on the matter is required before a party could hold more than 10 per cent of MTF’s shares. A shareholding by Heartland may also require amendments to the MTF constitution.

The second Heartland proposal

Higgs says: “In the letter we received from Heartland yesterday, it has now also stated it would be prepared to make an offer within a shorter timeframe to MTF shareholders to acquire between 10 and 20 per cent of the shares in MTF at a price of $1.50 per share subject to undertaking a more limited due diligence. “Heartland states this would be confined to confirming MTF has no actual, claimed or potential liability under the Credit Contracts and Consumer Finance Act [CCCFA] to any customers for ‘excess’ fees charged over recent years. Heartland expects this due diligence can be completed within one week. “Heartland states any offer by it – including this second proposal – would be an alternative to Turners’ offer, not an accompanying offer. Heartland has stated it would not make any offer to acquire shares in MTF in the event Turners obtains acceptances to its offer in excess of 10 per cent of MTF. “The due diligence and offer periods mean Heartland’s offer could not be made to shareholders or become unconditional before the timeframe for accepting the Turner’s offer had passed.” Higgs says the board’s view on Heartland’s second proposal, based on information currently available, is that it is uncertain whether an unconditional offer from Heartland will arise or, if one does arise, whether it will be allowed: • The board has not yet signed a non-disclosure agreement with Heartland to allow the due diligence to commence, and notes it was unable to agree confidentiality and process terms with Heartland when it approached MTF in 2014. • The offer will be contingent on Heartland forming a view on whether MTF has any actual, claimed or potential liability under the CCCFA to any customers for “excess” fees charged over recent years. The board is unsure whether Heartland can reasonably form a definitive view on this given the pending supreme-court proceedings in the Sportzone case. • In the board’s view, Heartland’s primary interest is in making a full takeover offer for MTF which, given due-diligence requirements and other issues that need to be resolved, cannot be made in the near term. Any acquisition by Turners of a significant shareholding in MTF would reduce the interest and ability of Heartland to make a successful full offer at a later date. • It also seems the primary purpose of the Heartland’s second offer (to acquire between 10 and 20 per cent of MTF shares in MTF at $1.50 each) is to limit the acceptances Turners receives so as to improve Heartland’s ability to make a successful full takeover offer at a later date. • As the offer is conditional on receiving 10 per cent or more acceptances, it will require the approval of the board and ordinary shareholders to be allowed. The board’s view is Heartland is a competitor with whom we have no wider business relationship and the board is extremely unlikely to recommend a transaction that allows Heartland to own more than 10 per cent of the voting shares of MTF –other than as part of a full takeover offer that was being recommended by the board for reasons of value. A shareholding by Heartland may also require amendments to the MTF constitution. “Given the uncertainty as to whether an actual unconditional offer will arise from Heartland, whether the acquisition of ordinary shares above 10 per cent would be allowed by the board, the required special resolution of ordinary shareholders and the fact that Turners’ offer will close before any unconditional offer could be made by Heartland, the board considers the Heartland proposal – on its own – does not currently provide sufficient cause to recommend to shareholders who would otherwise accept the Turners offer not to do so. “However, we note if Turners’ offer succeeds in acquiring approximately 10 per cent of MTF ordinary shares, such a holding may effectively block an offer by a party such as Heartland intending to acquire 100 per cent of MTF. The board will necessarily have to consider this as part of its assessment of the merits of allowing Turners or any other party to acquire in excess of 10 per cent of the shares of MTF.”

Other relevant information

Higss says: “The board wishes to remind ordinary shareholders they are under no obligation to accept any offer and there is no requirement for dry shareholders, who no longer originate loans with MTF, to sell their shares. “Acceptance of Turners’ offer will not guarantee you will be able to sell all the shares you agree to sell. When the offer closes, if total acceptances are greater than the amount Turners wishes to acquire, or is allowed to acquire, acceptances will be scaled taking into account the minimum holdings required for originating shareholders. “No offer or potential offer discussed in this letter would apply to, nor would any such offer affect the rights of, MTF perpetual preference shares.”