Behind Firstrand’s UK bid

Aldermore deal is about more than just SA’S slow growth — it’s about SA’S largest bank outgrowing the country

Aldermore, a little-known British retail and business bank, became something of a household name among local investors last week after it emerged that SA’S largest bank by market value, Firstrand, is keen to drop R19.4bn to buy it.

It’s a landscape-altering proposal — though it’s by no means a done deal. Firstrand is still in the throes of due diligence, but has until November 10 to make an offer or walk away.

If the deal goes through, Firstrand will join a growing list of SA companies — Famous Brands, The Foschini Group and Truworths — that have deployed capital in foreign markets as SA’S growth stagnates. Last year, Rand Merchant Investment bought UK short-term insurer Hastings for R8bn — a stake now worth R9.9bn.

But it’s about more than weak growth: in Firstrand’s case (as with Discovery and Sanlam), the company has simply outgrown an economy that contributes less than 1% to global GDP. Were it to mount a similar-sized takeover at home, the competition commission would block it.

If the deal gets the green light, it will boost Firstrand exposure to the UK from 5% to 12%. Luckily for Firstrand, it seems Aldermore — a challenger bank comparable with Virgin Money and Onesavings Bank — will be a good fit for a group that prides itself on innovation.

This is probably why Firstrand has described Aldermore as “the ideal platform” from which to fulfil its UK expansion strategy on an “accelerated basis”.

The SA bank is clearly willing to pay for that platform too, offering 313p/share — a 38% premium to Aldermore’s average share price on the London Stock Exchange in recent months.

But if it seems Firstrand is overpaying, this isn’t necessarily so.

This is a “reasonable and certainly not overgenerous” offer price, says London-based Investec analyst Ian Gordon. “In our view, Aldermore’s shares have been grotesquely undervalued for the past year.”

Firstrand’s offer even falls short of the value Investec believes an “independent, low-risk Aldermore” could generate. Gordon has reluctantly downgraded his rating on Aldermore from “buy” to “hold”. This, he told the Financial Mail, is due to limited upside following Aldermore’s share price rise — and the fact he isn’t expecting a counterbid.

At the time of writing, Aldermore was trading at about 305p (not far off its 316p record since listing in 2015) and near Firstrand’s likely offer of 313p/share.

This values the deal at £1.1bn.

Firstrand was always going to have to pay a premium for control. Mike van Dulken, from London-based Accendo Markets, says Firstrand’s 30% premium is “bang on average” for control, based on the most recent 100 UK deals.

Van Dulken says the offer price should please shareholders. Of course, the one shareholder that matters most is Anacap, the private equity firm that listed Aldermore in 2015 and

Firstrand

that still holds 25% of it.

But SA investors don’t exactly seem wowed by Firstrand’s plans.

Since the deal was announced, the bank’s share price is 3% weaker on the JSE, suggesting investors don’t see huge value in the proposal.

While including Aldermore would boost Firstrand’s earnings per share by 3.7%, those gains would be diminished by the fact that it will use the bank’s entire surplus capital, say analysts at Arqaam Capital.

By June, Firstrand had R19bn in surplus capital on its balance sheet — R7.5bn of which it had earmarked for growth opportunities.

Arqaam says the offer “fairly reflects the growth that the new platform provides”, as Firstrand will pay 1.7 times Aldermore’s priceto-book value.

“We view the potential deal as value neutral,” it says.

A deal has been on the cards since CEO Johan Burger said last month his bank was looking for a deposit franchise in the UK so it could sustainably fund Motonovo, its vehicle finance business in that country.

Motonovo contributed R1.2bn to Wesbank’s after-tax profit of R4.2bn for the year to June — a not-inconsiderable 28% of the total. Besides vehicle finance, Motonovo is also building a personal loans product. For the year to June, its advances grew 23%, while new business volumes grew 12%.

But taking over a retail bank is a solid plan, given that it is always going to be more expensive for Motonovo to use wholesale funding.