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Acquisition of North American Pay Day Lending Businesses and Fully Underwritten Rights Offer to Raise R525 Million
Finbond Group Limited
(Registration number: 2001/015761/06)
Share code: FGL ISIN: ZAE000138095
(“Finbond” or “the Company” or “the Group”)
ACQUISITION OF NORTH AMERICAN PAY DAY LENDING BUSINESSES AND FULLY UNDERWRITTEN
RIGHTS OFFER TO RAISE R525 MILLION
1. Introduction
Finbond shareholders are advised that the Company has embarked upon an earnings
enhancing growth strategy in terms of which Finbond will enter and expand its
short-term lending business into the North American pay day lending (short-term
lending) market.
The initial phase of this strategy will be through the acquisition of 4 North
American payday lending businesses in the United States of America (“USA”) and
Canada that will give Finbond a branch network of 91 branches in North America
and Canada of which 85 will be in the USA and 6 in Canada. To this end the
Company has concluded four unrelated acquisition agreements as follows:
- an agreement to acquire all of the shares and shareholders’ claims in
TV Profile LLC trading as ‘American Cash Advance – Payday Cash Loans’
with its 41 branches in Louisiana and Mississippi, USA (“the American
Cash Advance Acquisition”);
- an agreement to acquire all claims in the unincorporated business carried
on under the name Cash Shop with its 6 branches in Canada (“the Cash
Shop Acquisition”);
- an agreement to acquire the shares and shareholders’ claims in Cash in
a Flash Advertising USA Inc. trading as ‘Cash in a Flash’ and ‘Xtra Cash’
with its 8 branches in Indiana, USA (“the Cash in a Flash
Acquisition”);and
- an agreement to acquire 50% of the shares and shareholders’ claims in
Cashback LLC trading as ‘Cashback Payday Advance’, ‘Cashback Loans’ and
‘Cashback’ with its 37 branches [in the process of expanding by a further
5 branches] in Southern California, USA (“the Cashback Acquisition”);
(collectively “the Strategic Acquisitions”).
Following the Acquisitions, approximately 40% - 50% of Finbond’s net earnings
will be denominated in US$ within 12 months of the effective date and the
intention is to grow US$ earnings to approximately 70% - 80% of net earnings in
3 to 5 years.
2. Nature of Finbond Business and Rationale for the Acquisitions
Finbond is a leading South African financial services institution that
specialises in the design and delivery of unique value and solution based
short-term credit products tailored to borrower requirements rather than
institutionalized policies and practices.
Finbond conducts its business through two major divisions focussed on:
1.) Short-Term Micro Credit Products; and
2.) Investment and Savings Products.
Finbond’s Short-Term Micro Credit division is the largest provider of 30-
day loans in South Africa and currently operates nationally through 342
branches in South Africa.
Through the strategic acquisitions Finbond is expanding its Short-Term Micro
Credit Product division into the North American pay day lending market
through partnering with existing pay day lending stores with solid track
records of success and healthy cash generative short-term debtors books.
Following the strategic acquisitions Finbond’s North American Short-Term
Micro Credit Division will be advancing approximately US$130 million (R2,1
billion) per annum.
The rationale for the North American acquisitions includes:
- Earnings enhancing growth.
- Significant growth and consolidation opportunity in the North American
pay day lending industry.
- Organic growth in Finbond’s core “30 day” or “pay day lending”
competency.
- Diversification of Country and Political Risk.
- Effective ZAR hedge. Approximately 40% - 50% of earnings will be in US
and Canadian dollars 12 months after the North American acquisitions.
- Economies of scale.
- Teaming up with existing owner-managers with 10 - 30 years’ experience
operating pay day lending businesses in North America.
- Unique opportunity for South Africa’s largest short-term micro lender
to enter the USA pay day lending market.
Key features of the pay day lending market in the USA:
- Various similarities between the South African 30 day micro credit
industry and the USA pay day lending industry.
- US$38.5 billion (R 616 billion) in loans granted per year.
- US$46 billion (R736 billion) in revenues across the industry.
- Estimated 20 600 pay day lending stores.
- 19 million households use pay day loans annually.
- A typical pay day loan is US$300 borrowed over a 21 day period.
USA pay day lending customer demographics:
- Majority of customers earn between US$25 000 and US$50 000 per annum.
- 90% have a high school diploma or better.
- 54% have some college qualification or degree.
- 100% have steady incomes and 100% have checking accounts.
- 88% of customers believe it is a useful product.
- 89% of customers were satisfied with their last transaction.
Payday lending regulation in the USA market:
- Consumer Financial Protection Bureau formed in 2011.
- Payday lending in America is regulated on a State by State basis.
- 27 States authorize unrestricted payday lending. Nine States authorize
some form of term lending. Only 14 States and the District of Columbia
heavily regulate and limit personal lending.
- USA and Canada regulation is significantly more favourable than micro
lending regulation in South Africa.
- When considering the current regulatory environment in South Africa in
comparison to that of USA and Canada, Finbond is well positioned to cope
with current and future American and Canadian regulation.
3. American Cash Advance Acquisition
3.1. Nature of business
American Cash Advance specializes in offering short-term pay day
lending products directly to customers via 41 branch locations in
Louisiana and Mississippi, USA. The business started in 2001 with only
one store and has grown from strength to strength ever since. Currently
the business grants more than US$39 million (R624 million) in loans
annually.
3.2. Salient features
The salient features of the American Cash Advance Acquisition are as
follows:
- The purchase consideration payable by Finbond to the vendor is
US$8 million.
- The vendor provided a profit warranty to achieve a net profit
before tax (“NPBT”) of US$2 million for the year ending 28 February
2017.
- 50% of the purchase consideration set out above will be payable on
the effective date of the transaction in cash.
- The balance of the purchase consideration, being US$4 million,
will be paid to the vendors in cash following the determination of
the NPBT of the subject of the transaction for the 12-month period
ended 28 February 2017. For every US$1 by which NPBT for this
period differs from the US$2 million profit warranty, the payment
of US$4 million will be adjusted up or down, as the case may be,
by US$4 for every US$1 that it deviates from the warranted profit.
The maximum adjustment to this payment, either up or down, will be
US$4 million.
- The vendor in respect of the American Cash Advance Acquisition is
Paul Angelette.
- The effective date of the American Cash Advance Acquisition is 1
March 2016.
- The net asset value and net after tax profit of the subject of the
transaction amounted to US$2.01 million and US$1.3 million
respectively, based on unaudited results for the 12 months ended
31 December 2015.
3.3. Conditions precedent
The American Cash Advance Acquisition remains subject to the following
conditions precedent:
- The unconditional approval of the transaction by the Finbond board.
- Finbond securing all regulatory and exchange control approvals
that are required.
4. The Cash Shop Canada Acquisition
4.1. Nature of business
Cash Shop, based in Ontario Canada, was started by the current owners
in 2004. Cash Shop specializes in pay day lending conducting business
mainly in Ontario, Canada. Cash Shop currently has 6 stores on a
corporate level, which are the subject of this transaction, advancing
more than $7 million (approximately R112 million) in loans annually,
as well as 22 franchised stores throughout the province of Ontario.
4.2. Salient features
The salient features of the Cash Shop Acquisition are as follows:
- The purchase consideration payable by Finbond to the vendor is
CAD$6.5 million.
- The vendor provided a Profit Warranty to achieve a NPBT of CAD$1
million for the year ending 28 February 2017.
- CAD$2.75 million of the purchase consideration set out above will
be payable on the effective date of the transaction in cash.
- The balance of the purchase consideration, being CAD$3.75 million,
will be paid to the vendors in cash following the determination of
the NPBT of the subject of the transaction for the 12-month period
ended 28 February 2017. For every CAD$1 by which NPBT for this
period differs from CAD$1 million, the amount of CAD$3.75 million
will be adjusted up or down, as the case may be, by CAD$5.50. The
maximum adjustment to this payment of CAD$3.75 million, either up
or down, will be CAD$2.75 million.
- The vendor in respect of the Cash Shop Acquisition is 2473614
Ontario Incorporated.
- The effective date of the Cash Shop Acquisition is 1 March 2016.
- The net asset value and net after tax profit of the subject of the
transaction amounted to CAD$738 385 and CAD$194 209 respectively,
based on unaudited results for the 12-months ended 31 December
2015.
4.3. Conditions precedent
The Cash Shop Acquisition remains subject to the following conditions
precedent:
- The unconditional approval of the transaction by the Finbond Board.
- Finbond securing all regulatory and exchange control approvals
that are required.
5. The Cash in a Flash Acquisition
5.1. Nature of business
Cash in a Flash was founded by the current owner in September of 1995.
The business specializes in short-term pay day lending operating via
eight customer facing stores in Indiana, USA granting more than US$2.5
million (R40 million) in loans annually.
5.2. Salient features
The salient features of the Cash in a Flash Acquisition are as follows:
- The purchase consideration payable by Finbond to the vendor is
US$1.2 million. The vendor provided a profit warranty to achieve
a net profit after tax (“NPAT”) of US$300 000 for the year ending
28 February 2017.
- 50% of the purchase consideration set out above will be payable on
the effective date of the transaction in cash.
- The balance of the purchase consideration, being US$600 000, will
be paid to the vendor in cash following the determination of the
NPAT of the subject of the transaction for the 12-month period
ended 28 February 2017. For ever US$1 by which NPAT for this period
differs from US$300 000, this payment of US$600 000 will be
adjusted up or down, as the case may be, by US$4. The maximum
adjustment to this payment of US$600 000, either up or down, will
be US$300 000.
- The vendor in respect of the Cash in a Flash Acquisition is Rick
Matijevich.
- The effective date of the Cash in a Flash Acquisition is 1 March
2016.
- The net asset value and net after tax profit of the subject of the
transaction amounted to US$669 847 and US$111 123 respectively,
based on unaudited results for the 12 months ended 31 December
2015.
5.3. Conditions precedent
The Cash in a Flash Acquisition remains subject to the following
conditions precedent:
- The unconditional approval of the transaction by the Finbond Board.
- Finbond securing all regulatory and exchange control approvals
that are required.
6. The Cashback Acquisition
6.1. Nature of business
Cashback started doing business in 2003, with a focus on short-term
pay day lending in San Bernardino, California USA.
Since then, Cashback has grown to 37 locations throughout southern
California and are currently expanding its branch network by a adding
a further 5 locations.
Cashback grants loans to the value of US$75 million (R1.2 billion)
annually.
6.2. Salient features
The salient features of the Cashback Acquisition are as follows:
- The purchase consideration payable by Finbond to the vendors is
US$8 million for 50% of the shares in the business.
- The vendor provided a Profit Warranty to achieve an earnings before
interest, taxation, dividends and amortisation (“EBITDA”) of
US$3.2 million for the year ending 28 February 2017.
- 50% of the purchase consideration set out above will be payable on
the effective date of the transaction in cash.
- The balance of the purchase consideration, being US$4 million,
will be paid to the vendors in cash following the determination of
the EBITDA of the subject of the transaction for the 12-month
period ended 28 February 2017. For every US$1 by which EBITDA for
this period differs from US$3.2 million, this payment of US$4
million will be adjusted up or down, as the case may be, by US$5.
The maximum adjustment to this payment of US$4 million, either up
or down, will be US$4 million.
- The vendors in respect of the Cashback Acquisition are Treasure
Box Lp, Oh Ten Management LLC and Franklin Otten in respect of
45.54% of the equity, with the balance being acquired from 43 other
entities and individuals each of which individually owns less than
5% of the equity.
- The effective date of the Cashback Acquisition is 1 March 2016.
- The net asset value and net after tax profit of the subject of the
transaction amounted to US$8.5 million and US$1.7 million
respectively, based on unaudited results for the 12 months ended
31 December 2015.
6.3. Conditions precedent
The Cashback Acquisition remains subject to the following as yet
unfulfilled conditions precedent:
- The unconditional approval of the transaction by the Finbond board.
- Finbond securing all regulatory and exchange control approvals
that are required.
7. Fully Underwritten Rights Offer
In order to fund the purchase consideration in respect of the Strategic
Acquisitions, as well as working capital to further grow its North American
business, Finbond will undertake a fully underwritten rights offer to raise
approximately R525 million.
In terms of the proposed rights offer, 157 185 629 new Finbond Shares of
0.0001 cent each in the authorised but unissued share capital of the Company,
will be offered for subscription to Finbond shareholders recorded in the
register at the record date, who will receive rights to subscribe for rights
offer shares on the basis of 25.98001 rights offer shares for every 100
Finbond shares held, for subscription at 334 cents per rights offer share.
Finbond entered into an underwriting agreement with one of its shareholders,
Midbrook Lane (Pty) Ltd, who has irrevocably committed to fully underwrite
the rights offer. Pursuant to the underwriting agreement Finbond’s largest
shareholders, Net 1 Finance Holdings (Pty) Limited and Finbond Chief
Executive Officer, Dr. Willie van Aardt through Kings Reign Investments
(Pty) Ltd, irrevocably committed to support the rights offer by subscribing
for approximately R136 million and R75 million worth of shares,
respectively.
Finbond is currently in the process of obtaining the required regulatory
approvals for the proposed rights offer and the details and salient dates
relating thereto will be announced on SENS in due course.
8. Categorisation of the Transactions
The American Cash Advance Acquisition, the Cash Shop Acquisition and the
Cashback Acquisition are each categorised as a Category 2 transactions in
terms of the JSE Limited Listings Requirements. The Cash in a Flash
Acquisition is not categorised in terms of the JSE Limited Listings
Requirements.
Pretoria
5 February 2016
Sponsor and Corporate Adviser:
Grindrod Bank Limited
Legal Adviser:
MacRobert Attorneys
Date: 05/02/2016 09:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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