NSB’s entry in to TFC stirs up storm

• Rs. 50 per share paid in deal worth Rs. 400 m for Rs. 9.4b loss carrying and negative networth finance company giant was a hefty premium as per some analysts
• Others say given lack of liquidity, price for 13% strategic block was good; NSB eyeing future upside with likely further buying; TFC to get big boost from savings giant

Savings giant NSB’s entry in to the finance company business via the acquisition of 13% stake for Rs. 400 million in The Finance Company Plc (TFC) last week has stirred up a storm with some alleging it was an unhealthy move whilst others insisting it was a good buy.

On Friday a total of 7.982 million shares of TFC traded for Rs. 394 million, of which 7.14 million shares was done at Rs. 50 each, above Rs. 20 or 66% above the market. NSB’s broker Taprobane Securities said the savings giant bought 7.863 million shares at an average cost of Rs. 49.74 each.
TFC began trading on Friday at Rs. 30 with several more blocks done between Rs. 31 and 33 including 9,000 shares at Rs. 31.20. However, apparently setting the stage for the big deal a block of mere 100 shares was done at Rs. 43 whilst a relatively large block of 701,761 shares was executed at Rs. 45. Thereafter the crossing of 2.9 million happened at Rs. 50 each followed by another block of 4.237 million shares at the same price. In between a block of 100 shares went at Rs. 45 and an equal number of shares at Rs. 39 each. These in between deals suggest the erratic pricing. TFC last traded at Rs. 40 with a block of 115,300 shares.
Major sellers were ABC Broadcasting Corporation CEO and young business leader Rayynor Silva and shareholder cum non-executive director Dinal Wijemanne. Interestingly the latter is also the CEO of the NSB’s broking firm picked for the purchase.
The NSB buy on Friday sparked lot of market talk of deals within deals given the premium paid. Contentious talk included why TFC bought NSB when there are several other fundamentally sound and attractive shares in the market. Some also questioned whether the NSB had the sanction of its Board to go for such an investment.
However though at Friday’s early trading price the crossing reflects a premium, Rayynor and Dinal indeed bought the original stake in late September at Rs. 48 per share, which in fact was 52-week highest until Friday. On that score NSB had paid only Rs. 2 extra for the buyers.
Some alleged that the duo picked up the TFC stake in September last year to give stability with an understanding among a few stakeholders. The seller of that block was Dr. T. Senthilverl, also a Director at TFC and the biggest shareholder. Prior to September 2011 sale he held a stake of slightly over 27% and reduced his holding to 18.5%.
Parties to the sale said that there weren’t large blocks and the price paid by NSB for the strategic block was attractive for the buyer. TFC sources said for NSB it was a strategic buy and “first step” towards greater synergies. They also said given the inherent potential of TFC the price paid wasn’t a premium.
Other analysts said if NSB was keen to enter the finance company business, then with an equal amount it spent on Friday it could have started a venture under the Finance Business Act. But this notion was dismissed on the basis that TFC was an existing business and a giant in the league suggesting starting from zero would cost more for NSB.
Industry experts said NSB’s Act restraints diversification as well as direct engagement with other segments of the financial services industry. In that context entry and possible consolidation of stake via TFC would enable savings giant to tap prospects in the finance company business.
Following the acquisition NSB is likely to be offered two seats on the Board whilst analysts didn’t rule out it exploring prospects to enhance the stake. For TFC backing of NSB is being viewed as the next major breakthrough for its turnaround and future growth.
A reason for allegations that the NSB paid an undue premium was due to TFC’s negative networth of Rs. 23.57 per share (or Rs. 3.8 billion) as at end 2011. The Company also has retained loss of Rs. 9.4 billion. Between March 31, 2011 and 31 December 2011, its public deposit base had shrunk by Rs. 400 million to Rs. 20.45 billion. Its assets had declined to Rs. 20.49 billion from Rs. 21.43 billion whilst liabilities amounted to Rs. 24.2 billion, down from Rs. 25.2 billion.
However TFC sources said that the negative networth was a legacy from the past when the company ran into difficulties in tandem with the Golden Key fiasco. They said that under the new management there has been a turnaround with more progress on the cards. For example last month Rs. 1 billion in deposits had come in and TFC has a good high potential real estate portfolio.
Whilst TFC’s fourth quarter results are pending, analysts could only go by published accounts, which doesn’t show any significant growth in the Company’s core business though pawning and hire purchase segments have improved.
For the nine months ended on 31 December 2011, TFC made a profit of Rs. 15.8 million, as against a loss of Rs. 1.6 billion a year earlier. Net interest income was a loss Rs. 341 million, though lower in comparison to Rs. 544 million loss  but due to other income operating profit had improved considerably to Rs. 754 million as against a loss of Rs. 380 million loss in the first nine months of 2009/10 financial year. A Rs. 180 million reversal in credit losses saw TFC ending the 2010/11 9 months with a welcome profit. In the third quarter loss was Rs. 17.5 million, down from Rs. 440 million a year earlier.
Last month in a major and widely welcomed move the TFC announced the appointment of Cherille Rosa, a former Vice President Finance and Operations at Citibank’s Asia Pacific Technology and Operations Group, as an Independent Non-Executive Director.
NSB is not the only state entity which has interests in TFC. Others include EPF owning 8.4%, and People’s Bank (3.4%). BOC-linked Ceybank Unit Trust owns 5% whilst Seylan Bank also holds 7.4%.
Board of Directors of The Finance Company Plc comprises Preethi Jayawardena (Chairman), V.W. Dissanayake (Executive Director), Kamal Yatawara (CEO), T.B. Ekanayake (Executive Director), Ajith Devasurendra (Independent Non-Executive Director), Anura Fernando (Independent Non-Executive Director), R. Nadarajah (Independent Non-Executive Director), Dr. T. Senthilverl (Non-Executive Director), Dinal Wijemanne (Non-Executive Director) and C. Rosa (Independent Non-Executive Director.