Latitude focused on profit in $335m Humm bid

Lender Latitude’s chief Ahmed Fahour is unfazed by negative sentiment towards the BNPL sector as he crafts a profitable consolidation.

Latitude CEO Ahmed Fahour is expecting synergies with Humm’s BNPL business. Picture: Ian Currie

Credit specialist Latitude’s chief Ahmed Fahour is unfazed by rising negative investor sentiment towards the buy now, pay later sector amid a $335m move to buy Humm’s related business.

After predicting a big shake-out of the sector in mid-December as share prices of many BNPL players remain under pressure, Mr Fahour said the opportunity to buy part of Humm “started to emerge” late last year.

Latitude intends to lock in a deal to buy Humm’s consumer business for 150 million shares and $35m cash by the end of the month before completing the transaction by June, subject to various approvals.

It currently expects annualised combined synergies and cash earnings from the acquisition to exceed $100m pre-tax in full year 2023, with $70m of synergies including $50m from duplicate costs and technology rationalisation.

If the transaction proceeds, Humm Group chief executive Rebecca James will be invited to lead the combined group’s BNPL business, reporting to Mr Fahour.

Latitude’s bid comes after equity analyst Morgans tapered expectations around the earnings of major players like Afterpay and Zip because the BNPL sector is suddenly unloved by investors.

On Thursday, Mr Fahour drew a clear distinction between the rival credit companies pitching for consumers looking for interest-free, deferred payment options.

“The biggest issue weighing on investor minds is how do these people make money (by) spending a lot of money and where is the profit?”

“We (Latitude) make in excess of $300 million pre-tax profit on an annualised basis and we pay dividends and have been profitable every year as Latitude going back in time.

“And I think what’s really amazing about what Rebecca has done is that actually, other than us, the only other profitable player is Humm.

“People should be switching to buying Latitude.”

Latitude and Humm are not just “pure-play BNPL players”, he said.

The transaction will create a combined Latitude Group with more than $8bn of receivables and over five million customers, with 70,000-plus merchants.

“At Latitude, even with the Humm business, we will have two million customers that are BNPL and three million customers interest-free instalment customers, which is really where Humm’s and our heartland is.

“We also do auto loans and personal loans, which is one-third of our profit.

“We have this diverse offering to our customers and retail partners that cuts across all major streams of profitability.”

Humm’s agreement with Latitude came days after discussions with Bank of Queensland ended without a deal.

Humm chief executive Rebecca James will lead the combined BNPL business if the transaction proceeds.

The group, which provides BNPL services to small businesses, and credit card products in a partnership with MasterCard, had in early December told the ASX that it received approaches “from third parties to acquire all of part of (the group)”.

On Thursday, Mr Fahour did not reveal who initiated the discussions or the timelines.

”The reality is that we have known each other’s organisations and have been competitive for a very long time.

“Towards the back end of last year, conversations were able to take place whereby a potential of this opportunity started to emerge.

“I don’t know what else they (Humm) have got in terms of the opportunity, but what they did indicate to me is the other proposal … was for the whole of company.

“We came from a different view, we only wanted the consumer business because that is all we do and are not interested in anything else and their other core business is commercial, so works out well for their shareholders and for us.”

The proposed buyout of Humm’s consumer business is being viewed as the start of a new era of consolidation for the sector amid increasing regulatory scrutiny, potential for rising rates and higher funding costs and need for capital to feed growing demand.

Latitude said it is not concerned by regulatory scrutiny because of being ‘one step ahead’ in terms of creditworthy checks on all customers.

If successful, the deal, which is a focus for Latitude for the next six months, also has liquidity benefits for the group.

“We don’t have a lot of shares available on the market that are freely trading, only 23 per cent of our company is what they call free flow.

“In any one day, there is very little volume that goes through because of lack of the free flow.

If we complete this transaction, Humm has indicated the 150m Latitude shares will be distributed to their shareholders.

“About 36-37 per cent of our shares will be free flow which provides more liquidity and will be a real positive for our shareholders and allow more ownership to a broader range of retail investors.”

The transaction is expected to be double digit earnings per share accretive for Latitude assuming full run rate synergies.

At the end of June 30, Humm’s consumer business had approximately $1.8bn of net receivables and $152m of net tangible assets.

The proposed transaction will help Latitude accelerate growth in international markets, including Canada and Singapore where it has a presence.

Humm’s intended pro rata in specie distribution of the Latitude scrip is also subject to ATO, shareholder and other approvals.

Humm chairman Christine Christian said the board and management are committed to maximising shareholder value.

“In this context, we believe that the Latitude proposal is potentially attractive to HUM shareholders and warrants due diligence and detailed negotiation.”

There is no assurance that any binding agreement will be reached or that a transaction will occur and Humm shareholders do not need to take any action.

Humm is being advised by Flagstaff Partners and MinterEllison and Latitude by Jarden, KWM and KPMG.

Shares in Humm, which has a market capitalisation of $450m, are up more than 2 per cent to 92c at 3.50pm AEDT while the $2bn Latitude Group’s share price has also gained as much to around $2.