Deals: Cash Converters’ US Deal Falls Apart

Shares in Cash Converters, the Australian pawn shop and short term lending business, fell 3% yesterday after a deal by its largest shareholder to take control collapsed.

Cash Converters revealed in a statement to the ASX late Tuesday that Texan pawn giant EZCORP has withdrawn from a joint venture over fears the federal government will cap fees and charges for micro-lenders.

Cash Converters shares fell 1.5c or 3% 48.5c yesterday. They were down 2.5c or 5% in early trading.

The shares lost 37% of their value in August, mostly due to a proposed change in Federal laws (see below).

Under the terms of the deal, announced last March, the two companies had planned to enter a "strategic alliance" under which EZCORP would increase its stake in Cash Converters to 53%, from the current 33% and form two joint ventures to roll out the companies’ business model in new markets around the world.

But EZCORP terminated the deal because of concerns that proposed changes to the National Consumer Credit Protection Act could have a "material impact on Cash Converters’ consumer loan business in Australia".

"Accordingly, the proposed Scheme pursuant to which EZCORP would make an offer to shareholders to acquire further shares in Cash Converters, and the associated proposal for the parties to enter into certain Joint Ventures, have been cancelled," Cash Converters said in the statement.

"EZCORP has taken this decision in light of the announcement by the Australian Federal Government on 24th August, 2011 that it intends to amend the National Consumer Credit Protection Act and seek to introduce strict caps on fees and charges for micro-lenders.

"Although the amendments have not yet been passed, as currently proposed those limitations could have a material impact on Cash Converters’ consumer loan business in Australia.

"Accordingly, EZCORP is not willing to proceed with the transaction.”

The changes referred to were contained in amendments introduced into Federal Parliament to allow account switching between banks, as well as changes to the Consumer Credit Protection Act on: "Unjust transactions and unconscionable interest and other charges." Providers will be required in the contract document to provide "information that expressly advises the debtor of the provisions of this Code that relate to review of:  (a)  unjust transactions; and  (b)  unconscionable interest and other charges; and the debtor’s rights under those provisions."

Sounds innocuous, but as Cash Converters provides cash loans for up to six weeks and personal loans for up to three months, costs would have risen with the documentation, although you’d be entitled to think why there would be any worry in providing that information.

The online application contains no details on interest rates charged and penalties and other fees.

EZCORP’s president and chief executive Paul Rothamel was quoted in the Cash Converters’ statement as saying the company would retain its existing 33% in the company and remained committed to the success of the business.

Cash Converters said it had a number of strategies to mitigate the negative impact of the proposed reforms in Australia.

"To preserve the profitability of the Australian store network, Cash Converters can focus on other products and services which may provide an alternative solution for some of the financial needs of customers," the company said in a statement.

"Cash Converters will also consider directing additional resources into the United Kingdom where it has a 200 store chain (including 47 corporate owned stores) where its financial services products are experiencing exceptional growth and there is currently no cap on fees and charges."

The company said it would continue to lobby the government opposing the planned legislative changes, which it argues might leave many thousands of consumers who do not have access to credit from banks without any available credit from regulated and reputable lenders.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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