LONDON (Alliance News) - The Non-Standard Finance PLC hostile takeover of Provident Financial PLC took a "very significant development" Wednesday after Non-Standard Finance filed its offer document with the UK Competition & Markets Authority.
The watchdog will now carry out a 40-day Phase 1 investigation into the potential merger and has invited comments on whether the deal "raises competition concerns".
Non-Standard Finance's GB1.3 billion offer for fellow sub-prime lender Provident has become unconditional - after Non-Standard Finance lowered its acceptance condition to 50% from 90%. So far, holders of 53.5% of Provident shares have taken up the offer, but these accepting Provident shareholders also collectively make up the majority of Non-Standard Finance shareholders, holding shares in both companies.
The CMA noted that Non-Standard Finance has acknowledged that if both companies were to merge as currently constituted, it would "result in a substantial lessening of competition" due to the overlap of the companies home credit businesses.
However, Non-Standard Finance has previously indicated that if the takeover should go ahead it would demerge its Loans at Home business and list it in London as a separate entity in order to avoid this overlap.
Non-Standard Finance said Wednesday: "A de-merged Loans at Home will be independent of Non-Standard Finance, and continue to be a viable and effective competitor for home credit, especially given its strong market position as the UK's third largest provider of home credit."
The CMA responded Wednesday by pointing out that the shareholders in the separate Loans at Home company will be the shareholders of the enlarged Non-Standard Finance - which would include Provident shareholders.
"This means that, immediately after the proposed demerger, the shareholders in the enlarged Non-Standard Finance and Loans at Home would be the same. The CMA is inviting comments on whether the proposed demerger would remove the overlap in home credit and remedy the realistic prospect of an substantial lessening of competition that NSF has acknowledged," the regulator said.
"We are pleased to announce another important milestone in our offer today. We remain confident in the merits of our offer and the benefits it will bring for Provident, its customers, employees and shareholders," added Non-Standard Finance Chief Executive John van Kuffeler.
Provident reiterated its "significant concerns" with the offer Wednesday, in particular Non-Standard Finance's plan to demerge its Loans at Home business.
Provident said the "very significant development" of Non-Standard Finance filing its offer sheet with the CMA "introduces a far greater degree of uncertainty" for the offer than Non-Standard Finance has "previously indicated".
Provident noted that the CMA's investigation "is likely to require" a Phase 2, unless a remedy can be found to the acknowledged "substantial lessening of competition", and Provident does not believe Non-Standard Finance's solution is viable.
Provident added that it is "now beyond any doubt" that the investigation will be completed before the June 5 deadline for Non-Standard Finance to declare the offer wholly unconditional.
As a result, Provident believes Non-Standard Finance will have to declare the offer wholly unconditional without knowing any potential resolution the CMA might require for the offer to be accepted. This, Provident said, would leave Provident shareholders "exposed to a potential unknown and uncosted remedy, which it believes would be materially value destructive".
If the offer is completed before CMA approval, the two companies would be required to operate independently until such approval is granted. "In that time, while the two groups are operated separately, shareholders would not receive any synergy benefits supposedly offered by the acquisition," said Provident.
Provident noted "there is the additional and very real risk" the CMA will not find Non-Standard Finance's proposed solution "adequate", resulting in a Phase 2 investigation "lasting six months or more". If a proposed takeover is referred to a Phase 2 investigation prior to becoming unconditional, the deal lapses.
Provident added: "Non-Standard Finance's approach to the offer timetable has had the effect of depriving Provident shareholders of this protection and has exposed them to significant uncertainty and downside risk. Furthermore, if the remedy is not ultimately approved by the CMA, there is a risk that the combination would have to be unwound, incurring further value destruction for Provident shareholders."
Provident believes Non-Standard Finance "should show due consideration" to Provident shareholders and allow the offer to lapse, as Provident shareholders are unable to "assess or even estimate the full economic consequences" of the offer.
Shares in Provident were down 1.8% early Wednesday at 464.20 pence. Non-Standard Finance was trading marginally lower at 48.54p.
