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Heartland to buy PGG Wrightson Finance

Heartland Building Society is to buy PGG Wrightson's finance company for a nominal amount of about $100 million although the net cash position will see Wrightson forking out $2.5 million.

Tuesday, June 14th 2011, 7:27PM

by Jenny Ruth

That's because Wrightson will keep 18 bad loans with an estimated net value of about $90 million and give Heartland a three-year guarantee over another eight loans currently valued at $30 million.

Independent expert Northington Partners estimates the net cash payment Heartland will make to PGG Wrightson is just $7.5 million.

But the deal also involves Wrightson buying $10 million worth of Heartland shares.

That will be part of a minimum $55 million capital raising Heartland will use to finance the deal.

Heartland's former major shareholder Pyne Gould Corporation has agreed to take up another $10 million of Heartland shares and has agreed, with an unnamed third party, to underwrite the rest of Heartland's capital raising. The latter will involve both placements and a share purchase plan for Heartland's existing shareholders.

Heartland will gain loans worth between $400 million and $430 million, boosting its total assets to about $2.6 billion, and it also has a distribution agreement with Wrightson allowing it to continue using the Wrightson brand, even to the extent of having its own staff in Wrightson's rural supplies stores.

The finance company had total assets of $525.8 million at December 31 and net equity of $100.2 million.

"I wouldn't call it sweet-heart, but certainly we're very pleased with it, both in terms of the quality of the book and the strategic fit,"

says Heartland chief executive Jeff Greenslade who said earlier in a statement to NZX the deal will be per-share earnings positive for his company.

Greenslade says "co-locating" at the Wrightson stores is a key part of the deal.

"I think physical co-location is important to making the strategic alliance work." While Heartland will continue to use the Wrightson brand, it will give increasing prominance to the Heartland brand over time, he says.

Asked whether any other potential purchaser could have provided Wrightson with a more desirable alliance, Greenslade says: "I would like to think so."

Both companies have similar values and similar legacies. "Culturally, the two organisations have a lot in common." In particular, Heartland's focus is purely on New Zealand and it sees rural lending as a crucial part of its business going forward.

Wrightson chairman Sir John Anderson said in another statement to NZX the deal will "significantly delverage and de-risk" his company's financial position.

"While we recognise that financial services products remain important to our client's businesses, ownership of a financial institution is not required to facilitate this," Anderson said.

Northington Partners' report says without Wrightson agreeing to keep the bad loans and providing a guarantee for another $30 million, "it is very likely that Heartland would have required a significant discount to the purchase price" and Wrightson "believes that such a discount would significantly overstate the risk of further future losses."

Northington Partners concludes the deal is fair to Wrightson shareholders. Wrightson's debenture holders will also have to approve the deal although they are likely to approve it because they will go from holding debt of a "BB" rated Wrightson to holding debt of the "BBB-" rated Heartland.

The purchase is likely to further Heartland's ambition of becoming a bank. Greenslade says Heartland is still on track to apply for a banking license in the second half of this year.

"Clearly, this gives us more scale and diversity in terms of risk. I think those are positives," he says.

« Geneva chalks up another $6.2 mill in lossesHeartland faces obstacles to achieve bank status »

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