Speculation is mounting that Australian listed non-bank lender Latitude Financial could now be keen to walk away from its deal to buy Humm’s consumer finance business due to its deteriorating performance.
Latitude, which is led by Ahmed Fahour, announced in February that it had agreed to buy the Humm Consumer Finance business for $35m in cash and 150 million Latitude shares, valuing the deal at $335m at December 31 when its shares were $2.
But now, the transaction is valued at about $245m, with Latitude’s share price closing at $1.40 on Thursday.
The unit, which is involved in buy-now-pay-later lending, has gone from making about $50m a year to losing money amid a major fallout across the BNPL industry.
Humm’s founder and former chairman Andrew Abercrombie has been attempting to block the sale, urging investors not to approve the transaction in a vote on June 23 and recently increasing his shareholding to 22.5 per cent.
For the deal to proceed, Humm needs the approval of more than 50 per cent of shareholder votes cast.
Mr Abercrombie has earlier signalled that a price of $470m is the level where he would consider a sale.
The combined HCF and Latitude businesses would be the largest of their kind in Australia with gross receivables of $8.4bn, some five million customers and around 82,000 merchants.
Yet with Humm on Thursday revealing the state of the group’s performance, there are suggestions that Latitude may seek approval from the board to abandon the deal ahead of the vote, playing to Mr Abercrombie’s favour.
Should this be the outcome, Humm’s directors may resign along with members of senior management, leaving Mr Abercrombie, currently a non-independent, non-executive director, remaining.
The situation has haunting similarities to that which has recently played out at AGL Energy where shareholder Mike Cannon-Brookes lobbied against the company’s demerger plans, only for the company to shelve the demerger before a number of board members resigned, along with the chief executive.
Cash net profit for Humm’s consumer finance business for the year to date is down about 61 per cent compared to the previous corresponding period.
The unit’s receivables decreased by about 3.6 per cent between December and May as higher funding costs took their toll.
The other part of Humm’s business, its commercial lending unit, continues to grow strongly with its net profit up 47 per cent compared to the previous corresponding period.
“The trading environment is very tough for Humm Consumer Finance, with intense competition, rising interest rates, and weakening consumer sentiment,” Humm chairman Christine Christian said in a statement to the market on Thursday.
“Without enhanced scale, which the Latitude transaction will deliver, the outlook for HCF will be even more challenging.”
Mr Abercrombie has indicated that he would stay on and run Humm himself should a better offer not present itself.
Both Latitude and Humm, which is advised by Flagstaff Partners, can still walk away from the deal ahead of the vote if they are in agreement to do so.
Humm boss Rebecca James had agreed to move to Latitude.
Should the consumer finance unit be retained by Humm, expectations are that the business will need to embark on an emergency capital raising with risks of covenant breaches for its loan worth about $760m with investment bank Citi.
Citi oversaw Humm’s equity raising in 2020 to secure $140m at $1.14 which was said to be aimed at the time at preventing debt covenant breaches.
Humm Group directors on Wednesday also moved to respond to claims being made by Mr Abercrombie about the sale, saying that they believed that several were misleading.
They say that the offer for HCF from Latitude represents a compelling value proposition and Latitude is paying a control premium.
Other potential buyers have been given ample opportunity to put forward a higher offer but have not and that there is a material risk that Humm’s share price will fall significantly if the HCF sale is not approved by Humm.
“Mr Abercrombie has not referenced this material risk,” the company said.
“The majority directors also believe that the strong performance of Humm’s Commercial leasing business could be negatively impacted if the HCF sale does not proceed,” the company said.
“We strongly recommend all Humm shareholders vote in favour of the HCF Sale.”
Humm rejected Mr Abercrombie’s claims that the business was profitable, with it reporting a $9.7m cash loss for the six months to December, and dismissed a claim that Latitude was getting $106m of cash from Humm’s balance sheet.
At December, HCF had $106m of restricted cash, which the company said was not available to Humm or its shareholders, rather it was tied to receivables and debt financing, such as providing minimum liquidity for Humm’s lenders.
It also denies claims that it did not conduct a public auction sale process and that the Latitude agreement discouraged interested parties coming forward that might have attracted a higher offer.
Humm also dismissed suggestions that the Latitude deal undervalued HCF after an independent expert declared it to be fair.
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