Why Investors are Steering Clear of this Finance Company

Why Investors are Steering Clear of this Finance Company

Twice now, it was meant to be the biggest initial public offering (IPO) for the Australian market…

…and twice now it’s been pulled.

Last night the news alert came through: Latitude Financial had their public listing cancelled.

Which is odd…because at lunchtime yesterday they were announcing loudly that the company listing was ‘oversubscribed’.

Did they mislead us?

Was it a case of no one was interested…have Aussies run out of interest in IPOs?

I mean you don’t risk spending a few million to get all dressed up for the ball and then not go.

And the public humiliation that comes with having a company float pulled twice.

What gives?

Buying the lending machine

Let’s go back a few years to make sense of all this.

If you’ve ever walked through a Harvey Norman Holdings Ltd [ASX:HVN] store, you’ve probably seen all those ‘50 months interest free’ signs.

Well, the finance machine that offers those loans was GE Money. That was until 2015, when GE Money was broken up, and 50% of its book went to Wesfarmers.

And the other 50% was sold to a bunch of investment banks: Varde Partners, Deutsche Bank and KKR. Netting the trio about $8.2 billion for the consumer lending business.1

I have no doubt the purchase was never for keeps.

Investment banks don’t move into consumer lending business for the long term. From the get go, it would’ve always been about streamlining the business…and creating a public listing.

And the newly named Latitude Financial looked like it was on the right track.

It kept its exclusive lending contract with Harvey Norman. It came up with clever ads to encourage people to borrow. Alec Baldwin appeared out of nowhere on our TV screens in 2016, with clever phrases to entice us to use Latitude Financial.

It worked too.

Latitude Financial did grow. Myer Card, Go and 28 Degrees all signed up to white label Latitude Financial products.2

The financier was all set to IPO in March last year. The biggest one for 2018 it was called.

But in the middle of the royal commission, it was pulled. The company felt that perhaps publicly listing a finance company as banks and lenders were being dragged over hot coals was not going to fare well.3

So, the Latitude Finance listing was shelved for this year…

 

Debutante never got to the ball

Then, this year was the year Australia would see Latitude Financial debut.

Without the shadow of the Banking Royal Commission, surely there’d be more interest for the company.

Quite frankly, on paper Latitude was looking the goods.

In the four years since the investment banks took over, their costs were reduced and profits increased.

Then since 2016, the number of accounts jumped from 1.8 million to 2.6 million, against a loan book of around $7.6 billion. Plus a tidy net profit of $248 million in 2018. 4

It wasn’t so much a turnaround story…Latitude was always profitable…it was more that the trio of owners showed promise in growing the business…

Surely, 2019 was the year the consumer loan company could get out of the investment bankers’ hands.

And our favourite debutant got all dressed up for the ball again.

Then the IPO started to wobble.

First, the market capitalisation of the company kept diving…

From $5 billion, to $4 billion…to settling on a $3 billion market capitalisation just last week.

Then the initial share price — suggested price was $2–2.25 — fell to the lower range of $2 last week.

Come Tuesday morning, the IPO price fell again to $1.78…

Then by 10pm that night, the news was through. The Latitude Financial float was pulled for the second time.

Déjà vu?

How did the IPO of the year end up getting shelved again?

Was it a case of IPO fatigue from Aussies?

Probably not, suggests this chart:

Investor interest in ASX capital raisings

Source: Australian Financial Review

Capital raisings are maybe a little subdued, but investor interest in new listings hasn’t fallen off a cliff…

Is it a case of déjà vu? Investors remember the last two times big name floats disappointed the market? Like Dick Smith and Myer Holdings…

Perhaps.

Maybe investors are little more hardened now, and we are wary of private companies ‘dressing up’ a business and then putting it up for sale on the ASX.

Or just maybe, the trio investment bankers behind Latitude Financial misread investor sentiment.

The Latitude loan book is entirely built on consumers buying ever-increasing amounts of debt to continue to grow. And perhaps the lack of shareholder interest means we just aren’t ready to buy back into the debt equals growth story.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia