Arbuthnot Banking Group plc (LON:ARBB) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Arbuthnot Banking Group recently announced the acquisition of Asset Alliance. What can you tell us about that deal?
A1: We have long argued that ABG’s strong funding and capital position give it a competitive advantage in doing cheap deals in uncertain markets.
On 10 December 2020, ABG announced the acquisition of Asset Alliance (AA), a vehicle finance and related services provider, predominantly in the truck & trailer and bus & coach markets. The expected consideration is £4.1m, against an NAV of £8.1m (with acquisition adjustments, the expected negative goodwill (an equity uplift) is £1.7m). AA has leases with a net book value of ca.£150m. ABG expects 2021 EBITDA of £5.5m, and with lower-cost refinancing, we expect bottom-line profitability.
Q2: What does the deal tell us about the company strategically?
A2: For us, the important point about this deal is not the deal itself but, rather, what it says about the opportunities for a well-funded and capitalised bank like ABG. We expect a number of non-retail-deposit financing businesses to face increasing funding challenges through any downturn. With increasing arrears and bad debts, their profitability is likely to be sharply lower, and their capacity to lend into any recovery becomes minimal, if any. A backer such as ABG sees material refinancing advantages, and also enables a much faster growth rate in any recovery. Asset Alliance would have faced big losses as a standalone business, but it is likely to be profitable under ABG’s ownership.
Q3: What were the deal terms?
A3: The consideration is based on an agreed discount to the tangible net assets of AA at completion, after adjusting for the fair value of the assets available for lease and is to be £4.1m. After the usual accounting adjustments that will generate negative goodwill of £1.7m so ABG generates equity because it is buying assets at a discount.
AA is expected to report EBITDA of around £5.5m in 2021, which is in line with what it delivered in 2018. However, because under ABG’s ownership it can be funded by cheap retail deposits, we are expecting a profit of around a £1m when in 2018 AA reported a loss. There will be acquisition costs of £0.8m taken this year but you are looking at a business bought on discount generating around a million of profit for a consideration of £4.1m. As I mentioned earlier, Arbuthnot will be able to fund much faster growth than AA could have done alone.
Q4: What is the business it bought?
A4: AA provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. Operating from five locations, it is the UK’s leading independent end-to-end specialist in commercial vehicle financing, and it has over 4,000 vehicles under management. As at 31 August 2020, AA had assets for lease with a net book value of ca.£150m. We understand that the significant majority of the business is truck & trailer (it is also a broker for coach lending).
Q5: And do you expect Arbuthnot Banking Group to do more deals like this?
A5: Yes. It has the capital and funding to do several more deals like this. Unusually for a quoted company, such deals will add value because i) the sellers are in reality distressed and ii) ABG’s cheap funding brings something to the party as unprofitable stand-alone businesses can be made profitable under its ownership.