‘Latitude float crunched’ blared the headlines yesterday after the eye-watering $3.2 billion stock market float of Latitude Financial collapsed three days before it was due to list on the ASX.
Some said blamed the flop it on the market (oddly seeing the ASX is up more than 17% this year), others said look at the poor publicity surrounding the possible $24 million payout for CEO and former banker, Ahmed Fahour. But harder heads blame the collapse of the – the downturn in consumer spending thanks to the Canberra’s stagnating economy and weak retail sales and the rapid growth of new forms of consumer finance.
In short big investors refused to back Latitude this week – the float was at the wrong time, the wrong value and was the wrong business model for the times.
Latitude Financial is the old Australian arm of GE Money which needed to be bailed out in the GFC after its then US parent ran into trouble. It was bought in 2015 by three investors – KKR, Deutsche Bank and Varde Partners and renamed Latitude.
The trio tried to float it last year with a valuation of $5 billion which failed because it was viewed as being too expensive and the owners too greedy.
Mr. Fahour (who is a former senior NAB executive and successfully ran Australia Post and earned a lot of money) was hired after that flop to spearhead a new attempted listing this year (and promised a big payday down the track estimated at $24 million).
The second attempt collapsed on Tuesday – the float process started in August-September with a price range of $2 to $2.25 being set (valuing it around $3.5 billion to just over $4 billion) but that could not attract support and the size of the issue (the number of shares ) was cut and the price slashed to $1.78 to make it more attractive to investors looking for a quick profit ($3.2 billion).
That failed on Tuesday as investors refused to buy into the deal, leaving the promoters, Goldman Sachs, Macquarie and UBS (the three top names in fee clipping and rent-seeking in the Australian financial markets) with egg on their faces and tens of millions of dollars of fees in the ditch.
With the ASX up more than 17% this year and over 14% higher than when the 2018 float was aborted, it’s not market conditions that killed off the latest float attempt.
Perhaps it was the greed of the three owners in 2018 in trying to set a $5 billion valuation. High-value floats haven’t had a great track record in recent years. There’s the flop known as Myer and Dick Smith (the retailer) is no longer with us.
Spin-offs to existing shareholders of Domain (by Fairfax Media) and Coles (by Wesfarmers) have succeeded far better than many floats that raised cash from investors.
At between $3.1 and $3.5 billion it was still seen as being too big – indeed had it succeeded it would have been the biggest float in dollar terms this year on the ASX.
But the biggest obstacle was the exposure to retailing for much of its revenue and profits (from selling high cost loans). Around half its operating income from instalment consumer loans, with most of the remainder coming from personal loans, auto loans and credit cards. Its business includes Myer credit cards and point of sale finance at stores such as Harvey Norman, Apple and JB Hi-Fi.
That gives it a big exposure to the worst-performing sector of the economy – as the downgrade from furniture retailer, Nick Scali on Tuesday confirms. And its high interest, instalment credit model is battling the emergence of the buy now, pay later instalment credit systems developed by the likes of Afterpay Touch (https://afterpaytouch.com) which are based on smartphones and apps, not long application forms.
This form of finance has yet to be tested in a credit crunch or recession, but at the moment it is making life tough for the likes of Latitude and big investors this week responded to that growing competition and refused to put their members savings into a high cost, old fashion finance business whose three private equity owners have already shown their greed with the high price on the 2018 float attempt.
Even though interest rates on houses and (and officially) are at or near all time lows, consumer credit rates are still above 10% in many cases and close to 15% in others.
Latitude has a lot of debt (five times its capital) and forecast in its prospectus that it will lose about 24 cents of operating profits to loan impairment expense in 2019 (they are loans that go bad or the holder falls behind in their payments and the value of the loan has to be written down or written off completely).
If the current employment boom slows and unemployment numbers start rising, that increases the risks of these loans by Latitude going bad. Unlike mortgage holders, the loans marketed by Latitude loans do not get the benefit of the RBA rate cuts.
Latitude simply raises its money at lower rates and pockets the gains, not its customers. It overexposed to the stagnating economy and equally exposed to newer forms of consumer finance. And that was poison for big investors this week.