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Questor: OneSavings is to merge and the shares have gained 23pc. Should we take profits?
Questor Income Portfolio: this column is sceptical about the claimed benefits of many mergers. We’ll take a good look at this one before we decide whether to hold the shares
Hot on the heels of the proposed takeover of one of our holdings, Dairy Crest, comes the announcement of another deal, this time the merger of the Income Portfolio’s OneSavings Bank with a smaller rival, Charter Court.
News of the proposed transaction has already helped OneSavings’ shares to a 23pc premium to the price we paid in November 2016. Now we have to decide whether to bank those profits and find a new home for the money, as we must do with Dairy Crest, which is being bought for cash, or hang on to the shares in OneSavings in the hope that the new enlarged bank can continue to thrive.
Questor’s instinct is always to be sceptical about mergers and acquisitions thanks to their habit of failing to live up to the promises made beforehand by the management teams involved. However, every case is different and we will attempt to judge this one strictly on its merits.
Perhaps the most important question to ask is: who will manage the combined business? When both sets of managers want a hand in running a combined entity, things can get messy: no ship ever enjoys plain sailing when there are two captains on board.
Fortunately in this case, clear-cut management arrangements have been agreed.
The deal is being structured as a takeover of Charter Court by OneSavings (the latter will issue new shares with which to acquire the shares in the former). This reflects the fact that OneSavings is the larger outfit; after the merger its shareholders will own about 55pc of the new entity.
In accord with this, the two key management roles of chief executive and finance director will both continue to be filled by the incumbents at OneSavings, Andy Golding and April Talintyre respectively.
The current Charter Court board will contribute the chairman and four non-executive directors to the combined management team, but these roles are less significant as far as the direct operational control of the business is concerned.
Another worry when two companies combine is whether their businesses are sufficiently similar in culture or whether problems will arise when integration begins. Again, we can probably breathe easily. Both are fairly newly listed and run in an entrepreneurial style, although OneSavings’ roots lie in the old Kent Reliance Building Society.
They operate in broadly the same markets: they lend to property investors such as buy-to-let landlords and developers.
Ian Gordon, an analyst at Investec, the investment bank, said he regarded the task of integrating the two lenders as “very low-risk” because “they don’t need to change much – the existing brands and distribution channels will be maintained”.
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He added that the £22m a year in eventual cost savings predicted to come from the merger would arise largely from having one head office rather than two, although savings in IT and in preparations for a new regulatory regime could also help.
“The merger proposal does not make heroic assumptions about cost savings,” he said.
Another possible benefit of the merger should be a greater range of funding sources. Charter Court has more experience in “securitisation” – selling packages of existing loans – and this could benefit the combined group’s overall cost of funding.
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In terms of the income we can expect in future if the deal goes ahead, nothing should change. The two banks have identical dividend policies, namely to pay out 25pc of adjusted profits, and this will continue.
As both banks have been growing very rapidly, we can expect earnings growth to drive dividend growth, although paradoxically a slowing of growth could allow the combined bank to pay out more of its profits as it would need to hold back less capital to support growth in the loan book.
Gordon said recent figures from both banks – OneSavings reported full-year results yesterday – were “stunning” and described OneSavings’ valuation of 5.6 times expected (ex‑merger) earnings next year as “absurd”. OneSavings’ profits before tax rose from £167.7m to £183.8m, or to £193.6m on an “underlying” basis.
A final dividend of 10.3p was proposed, making a total of 14.6p for the year. This is a 14.1pc increase on last year’s 12.8p. We will hold on to the shares in expectation of a successful and profitable merger.
Questor says: hold
Ticker: OSB
Share price at close: 396p
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