07 Jun 2007
Details of the proposed demerger of the international home credit business
Provident Financial plc ("Provident") today announces details of the proposed demerger of its international home credit business ("IHC"). Pursuant to the demerger, IHC (comprising Provident International Holdings Limited and its wholly-owned subsidiaries) will be transferred to International Personal Finance plc (a newly established public limited company which has been incorporated to be the holding company of IHC) ("IPF"). Subject, inter alia, to shareholder approval, the demerger will result in Provident shareholders receiving one share in IPF for every Provident share they hold.
Presentations to research analysts on each of the two businesses will be held today at the offices of Dresdner Kleinwort, 30 Gresham Street, EC2P 2XY at 10.30a.m. The key highlights of these presentations are:
The key reason for the demerger is that the UK and international businesses have different strategic agendas calling for different management skills and focus. Both businesses are expected to benefit from the demerger. The international business will be better able to capture its growth opportunities through greater management focus and the closer alignment of management incentives to the performance of the international business. The UK business will be able to concentrate on developing a more broadly based business focused on the UK non-prime consumer credit market.
The demerger is expected to result in stronger operational and financial performance for both businesses.
The demerger will offer a choice of investment into two attractive and successful businesses with markedly different characteristics.
Provident will, prior to the demerger, introduce £70 million of additional capital into IHC to adequately capitalise it as a stand-alone business.
In the absence of unforeseen circumstances, Provident and IPF intend to pay an aggregate dividend in respect of 2007 of 36.50 pence per share, equal to the Provident dividend per share paid in respect of 2006.
Provident - post-demerger
The UK home credit business will build on its leading position in the UK specialist consumer lending market and is expected to grow and to continue to benefit from (i) the continued diversification of marketing channels for new customer recruitment, (ii) improved customer segmentation and contact management, (iii) product innovation and enhanced lending decision processes and (iv) the introduction of new technology, allowing a streamlining of its cost structure.
Vanquis will continue to focus on the provision of credit cards to the non-prime market. In the medium-term, it is believed to have the potential to exceed 500,000 customers and £300 million net receivables and to earn a post-tax return on equity of around 30%. Vanquis is expected to trade at around breakeven in 2007.
There is an increasing market opportunity for Provident's UK businesses because of a combination of growth in the UK non-prime market and the tightening of lending criteria by mainstream credit providers.
The UK business has a large, dynamic customer base and a national branch infrastructure. It aims to build on its leading position in the UK specialist, non-standard lending market and in particular to improve its retention of the estimated 200,000 customers who migrate up the credit quality chain each year, through extension of its product range to include agent and non-agent collected unsecured and secured personal loans over longer repayment terms.
In the absence of unforeseen circumstances, the board of directors of Provident intends to pay a dividend per share for 2007 of 31.75 pence per share (before adjustment for the proposed consolidation of Provident's share capital). It is the intention of the directors to at least maintain the dividend per share with a medium-term objective to build cover until a dividend payout ratio of 80% is reached.
Provident has pro forma net assets as at 31 December 2006 of £207.1 million, after allowing for adjustments in respect of the £70 million capital injection into IPF, net proceeds of £162.7 million from the sale of Provident Insurance, demerger costs of £20.4 million and after deducting the 2006 final dividend of £56.4 million paid in May 2007.
As at 31 December 2006, Provident has a pro forma equity to receivables ratio of 23%. The directors consider that a capital structure with a ratio of ordinary shareholders' capital to receivables of 15% compared with the current target of 20% is appropriate. This implies surplus capital of some £80 million on demerger. However, in light of the high dividend payout ratio, this surplus will be retained in the near term to fund growth opportunities and provide a sensible degree of strategic flexibility. Provident may consider share buy-backs as and when appropriate.
Cost savings of almost £3 million per annum are expected after the demerger as a result of a reduction in corporate overhead costs.
The Fitch Issuer Default Rating has been maintained at BBB+ and the estimated weighted average cost of debt is unchanged at approximately 7%.
The UK business has made a positive start to 2007.
A proven record of building successful, capital generative businesses in emerging markets underpinned by an experienced management team.
A substantial business spanning six countries, with 1.8 million customers, 28,400 agents and over 5,000 employees.
Pro forma pre-tax profit for 2006 of £39.9 million, based on IHC's reported segmental profit for 2006 of £46.2 million and allowing for the increased costs of operating as a stand-alone and listed business of £9.1 million and a reduction in borrowing costs of £2.8 million (mainly attributable to the £70 million capital injection on demerger).
Significant opportunities for future growth from the fast growing demand for consumer credit in IPF's existing markets and from a target list of eight large new markets to enter, including Russia, India and the Ukraine.
A clear strategy to seize the opportunities for growth: (i) to increase the pre-tax profit from the established Central European markets by 50% to about £95 million at maturity, (ii) to realise the potential of the markets currently under development, Mexico and Romania, with a target pre-tax profit from these markets of £90 million and £20 million respectively at maturity and (iii) to enter further emerging markets, with a plan to enter three to four countries over the next five years.
Mexico is expected to report a profit in 2009 and Romania, which has recently successfully completed the pilot stage and been approved for national roll-out, is expected to report a profit in 2010.
In 2007, approximately £15 to £16 million will be invested in start-up losses from developing markets, principally Mexico and Romania. Thereafter, for the medium-term, IPF's target start-up losses in developing new territories is expected to be broadly equal to 25% of pre-tax profits before such start-up losses.
IPF intends, subject to satisfactory completion of due diligence, to commence a pilot in the Russian market in the latter part of 2007 which may include the acquisition of a small bank costing about £3 to £5 million.
Pro forma net assets as at 31 December 2006 of £150.2 million as adjusted for a £70 million capital injection from Provident, giving a pro forma equity to receivables ratio of 45%. This level of capitalisation recognises the risk profile of the emerging markets in which IPF operates and underpins its future requirement to attract debt finance to support its growth strategy. In the longer term, IPF targets to reduce the equity to receivables ratio towards 20% as the business matures.
IPF's Central European operations are already generating substantial surplus capital. In 2006, they generated surplus capital of £37.8 million which was available to fund both new country development and dividends.
In the absence of unforeseen circumstances, IPF intends to pay a dividend of 4.75 pence per share for 2007 and thereafter to adopt a progressive dividend policy reflecting the profitability of IHC's businesses as well as its capital and cash flow requirements, with a medium-term objective of moving to a dividend payout ratio of approximately 25% of profit after tax. IPF believes that this will allow the capital requirements of its growth strategy to be met from retained earnings.
The tax rate for 2007 and thereafter is expected to be approximately 30%.
IPF has made a strong start to 2007 across all markets.
Friday 22 June 2007
Posting and publication of circular and prospectus
Friday 13 July 2007
EGM to seek shareholder approval for the demerger
Monday 16 July 2007
John van Kuffeler, Chairman of Provident, commented:
"The separation of the UK and international businesses is good for the two businesses and good for shareholders. The international business will be better able to secure its exciting growth prospects, and the UK business will be free to build on its leading position in the UK non-prime consumer credit market. The board of Provident believes that this move will maximise shareholder value in both the near and longer term."
Christopher Rodrigues, Chairman Designate of IPF, commented:
"The international business has a proven and successful model and an experienced management team. We see many opportunities both in our existing markets and in new emerging markets. We are all looking forward to the next exciting phase of the business' development."
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