FirstRand’s Aldermore Offer Puts Challengers In Play

No majority, no problem

An indicative offer for Aldermore (LON:ALD) spotlights increased overseas interest in Britain’s ‘challenger banks’.

Aldermore shares are holding their ground this week, having soared at the end of last week, on news of preliminary talks with $22bn FirstRand (JO:FSRJ) about a takeover worth £1bn. The Johannesburg group now says its offer is not conditional on a unanimous recommendation.

Both parties highlight the lack of certainty of a firm offer at this stage, whilst the Takeover Panel’s ‘put up or shut up’ rule has kicked in, with a deadline of 1st November. However, Aldermore has told its suitor it is “likely to recommend” an offer if one is forthcoming at the flagged price. The mooted sum equates to cash of 313p per ordinary share.

It’s worth noting the stock has not quite reached the offer price even after Friday’s 19% bound. Scepticism is the traditional interpretation when a takeover target’s shares don’t match the bid.

Challenged

In fact though, it’s difficult to detect much more than prudent caution at Aldermore itself over the prospect of giving up control. Perhaps this is not so surprising. The seven-year old institution is better apprised of the outlook for its market than most. Having grown by acquiring a clutch of minor commercial lenders, Aldermore’s focus remains on small-to-medium-sized businesses; particularly their mortgage needs. It was a great idea post GFC. But last year’s sterling crash and lingering weak rates weakened the sector’s economics. Only the very strongest of the dozen or so challengers may thrive under current conditions. And soon, higher capital requirements will pile further pressure on after the BoE recently ordered banks to raise capital, in case the consumer credit ‘boom’ goes sour.

Aldermore going for less than average

With a net interest margin of 3.2%, Aldermore makes relatively average profits from lending, although forecast return on equity for fiscal 2017, at 17.6%, is set to top Metro, Virgin Money (LON:VM), OneSavings and others. Investors have still nevertheless discounted Aldermore to the low end of the peer group’s price-to-book range. A forward 9.74 times rating is also timid vs. rivals’ average low double-digit value. FirstRand’s indicative offer is similarly circumspect, implying a valuation below key mortgage rival Lloyds Banking Group (LON:LLOY).

FirstRand interest won’t be the last

The shortfall can be pinned on outlook uncertainties, underlined when Aldermore missed its own loan growth targets in H1, with similar let-downs seen across similar-sized lenders. Shares of these have also seen a tailwind in recent days, suggesting investors expect further suitors to come knocking on challengers’ doors, driven by further opportunistic impetus as free cash flow generation trends lower across the board.

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Technical terms

The most striking point in Aldermore stock’s technical price chart is that last week’s huge spike hit a ceiling at almost the exactly same price—309.70p—of an aggressive rejection in late August 2015 (see red ellipses on chart below).

A clear sharp sell-off—and I think the sustained one that followed 2+ years ago qualifies—denotes action by institutions. In light of Friday’s repeated tag of 309p, it becomes a line in the sand, signifying sentiment on FirstRand’s deal. 309p is also close to record highs around 318p in July 2015. In theory those pitch the bar even higher, from an investor perspective. Failure to breach 309p resistance in coming days won’t necessarily signal a blow to an eventual deal, however we would expect the stock to weaken; at least to the upper limit (c. 255p) of the stock’s all year till Friday. The stock is of course now deeply overbought, as well.