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The biggest IPO in 2018 is about to hit town. Later this week, fund managers will sit down with investment bank Deutsche to get a briefing on Latitude Financial Services. They are being sounded out as potential “cornerstone investors” in a $5 billion IPO, the largest on the ASX since Medibank Private.
Latitude is probably best known for its recent TV advertisements featuring Hollywood star Alec Baldwin, who in 2016 shot to worldwide attention and acclaim for his portrayal of Donald Trump on Saturday Night Live. In Australia, Baldwin is currently the face of a campaign by Latitude to “better your bank by 1%” – an offer for personal loan customers to switch from the major banks to Latitude and save 1% on their rate.
But Latitude is not a new age, “fintech” style business. In fact, this consumer lending business has been around for more than 15 years, mainly under the ownership of GE Capital. In March 2015, GE Capital sold its Australian and New Zealand business for an enterprise value of $8.2 billion to a consortium led by Deutsche Bank, Kohlberg Kravis Roberts (KKR), and Värde Partners. The business was renamed Latitude Financial.
Latitude has more than 2.6 million customers in Australia and New Zealand and provides personal loans, credit cards, insurance and interest free promotional and retail offers. Some of these products are distributed directly or via brokers under Latitude’s brands, while others are offered in partnership with major retailers under the retailers’ brands.
In credit cards, Latitude has a receivables book in Australia of more than $3.8 billion with over 1.8 million accounts. Brands include 28 Degrees, GO, GEM Visa, Myer Black, Myer Visa, CreditLine and Buyers Edge.
Total receivables are over $7 billion, and include a consumer loan book in Australia of $1.6 billion that offers car loans and secured and unsecured personal loans.
Latitude is reportedly now earning around $300 million in net profit. Profitability has grown in part due to actions to rein in costs. Since the new owners took over in 2015, staff numbers have fallen from 2,200 to less than 1,800 today.
The first issue that potential investors in the IPO should consider is; why are the existing owners (KKR – private equity, Värde – alternative investment firm and Deutsche Bank – investment bank) selling? This is particularly relevant as they have only owned the business for a couple of years.
Has this business just been dressed up for a quick sale? A new management team brought in, high profile brand campaign launched, costs cut to improve profitability…what do they know that we don’t? Are they worried that this is the bottom of the credit cycle (ie as good as it gets), and when interest rates rise (as they are expected to do from late 2018), will credit losses also rise?
Some of these questions will hopefully be answered in the Product Disclosure Statement (PDS) for the IPO. Key things to look out for will include how many shares they hang on to, and any escrow restrictions (hard or soft) on these shares.
And while many private equity sell-downs in Australia have a bad odour (Myer is the most often cited example), not all end in tears for new shareholders. Link is an example of a very successful IPO.
A second issue is whether the company will face the prospect of supportive industry and technology tailwinds, or may in fact run into headwinds such as rising interest rates that curb credit growth and increase bad debts. My sense is that the vendors will be trying to make out that Latitude is very much the “new age, fintech” business, set to benefit from Government and regulatory pressures on the big bank oligopoly, new technology, open data standards, positive credit reporting etc. Again, a close reading of the PDS will be needed to separate the “fact” from the “fiction”.
Finally, like all IPOs, it will come down to valuation. It has been reported that the business will priced on a multiple of around 15 times forecast earnings, giving it a price tag of around $5 billion. Although not directly comparable, and with arguably very different growth prospects, the major banks are trading on multiples of 12.0 to 13.5 times. In fact, finding direct comparables is going to be a bit tricky, but in the diversified financials space, companies such as Eclipx (ECX), Credit Corp (CCP) and even Flexigroup (FXL) come to mind. Eclipx is trading on a multiple of 13.5 times, while Credit Corp is trading at on a forecast 15.0 times.
In the coming weeks, expect to see some noisy “cheer squads”. The noisiest and the biggest will be the supporters of the IPO. This will include (obviously) the vendors, the investment banks and brokers being paid to sell the deal, the cornerstone fund managers, and some well-briefed members of the media. All have one aim – to increase demand for the stock, and ultimately, the price.
The lead managers are Deutsche, Goldman Sachs and UBS. Because it is a big IPO by market standards, the lead managers are likely to engage a syndicate of other brokers, including retail brokers, into manager and co-manager roles. So, if you want to secure some stock, cuddle up to your broker now.
On the other side of the field, and nowhere near as noisy, will be the investment banks that missed out on the deal. You might also see some fund managers who declined to participate in the transaction talking publicly about how the IPO is over-priced.
At the Switzer Report, we will tell you what we think when we see the PDS.