Cash impact of finance co sale to cost PGG Wrightson $2.5m

By Jenny Ruth

Tuesday 14th June 2011

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.

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.

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

"The acquisition is highly complementary with the existing Heartland business and can be integrated efficiently," Greenslade says.

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."

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