Australian Finance Group Ltd (ASX:AFG) has entered into a binding conditional implementation deed to merge with the mortgage aggregation business of Connective Group Pty Ltd. Connective has a network of over 3,600 brokers across five states with a panel of more than 50 lenders. The combined group will create a significant national mortgage distribution network, with more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19.
Under the transaction, Connective Group Pty Ltd will receive $60 million in cash and 30,886,441 AFG shares valuing the acquisition at $120 million, with AFG to primarily fund the cash component through a new corporate debt facility. The transaction is expected to be EPS accretive (pre-synergies) in the first full financial year post integration and AFG is currently expected to maintain a dividend payout ratio of between 60 and 80 per cent.
AFG Chairman Mr Tony Gill said: “The merged business will have a significant national footprint in Australia’s $1.8 trillion home loan market. The delivery of competition and choice to the Australian lending market is at the core of our strategy. The expanded distribution channel and broader diversification of products the combined group can supply will provide greater choice for both brokers and consumers”.
AFG Chief Executive Officer David Bailey said: “AFG’s ongoing successful execution of our earnings diversification strategy in recent years has the business set up for strong cash flow generation and well positioned for growth. The prospect of complementing AFG’s existing business with the cultural fit and similar customer-focused philosophy of the Connective business is compelling.
“Competition is at the heart of both businesses with the non-major lenders representing 48 per cent of residential mortgage lodgements through AFG’s network in July 2019. Greater geographical portfolio diversification positions the merged group to further enhance choice and competition for consumers in all markets across Australia. Together with AFG’s existing growth plans, the opportunity presented by the sale process undertaken by Connective was absolutely aligned to our strategy.
“With extensive experience in the mortgage broking industry and proven management expertise, respected senior executives Glenn Lees and Mark Haron will continue to run Connective’s business and will retain a significant shareholding in the merged group. I look forward to working with Glenn, Mark, the Connective team and their network of brokers to create a driving force in competition in the Australian lending market.”
Connective CEO Glenn Lees said: “The coming together of the Connective and AFG teams is a natural fit. We share a strong set of values with the priority to always work on behalf of our brokers. I am incredibly proud of the business and, alongside the team, I look forward to continuing to drive the success of our brokers who positively impact the lives of thousands of Australian home buyers every year.
The transaction remains conditional upon a court validating the transaction as not being unlawful or able to be set aside (a non-customary condition), Connective Group Pty Ltd shareholder approval, approval from the Australian Competition and Consumer Commission and AFG Shareholder approval (if required), as well as other conditions typical of a transaction of this nature.
Mr Bailey said the transaction represents an opportunity for all AFG shareholders to benefit from the diversification and flexibility of the combined group.
“Connective brokers will have access to AFG’s securitisation program and the combined network also offers the opportunity to grow scale in both asset finance and commercial lending. Connective brings a contrasting revenue model based on fixed membership fees and offers services across residential, commercial and asset finance, as well as its own range of white label home loan products under the Connective Home Loans brand.”
“This should result in more lender and product opportunities for brokers, which in turn means more choice for their customers. This is particularly important for the self-employed and SME sectors of the market that are presently under banked.”
“When we also consider the possibilities for both cost and revenue synergies together with the leverage of the distribution potential, the transaction becomes one we are delighted with. We will continue to update the market as we reach key milestones in the process.”
On completion of the transaction, Mr Lees, a founding shareholder of Connective, will be offered the opportunity to join the board of AFG.
Further details of the key terms of the transaction are set out in the schedule.
AFG will keep the market informed of progress of satisfaction of the conditions precedent to the transaction in accordance with its ASX continuous disclosure obligations.
