The Australian Competition and Consumer Commission (ACCC) is set to probe mortgage aggregator Australian Finance Group Ltd (ASX: AFG)'s proposed takeover of rival Connective. Australian Finance Group is one of Australia's largest mortgage broking groups, settling over $31 billion in residential loans in FY19.
The proposed $120 million merger with Connective, which was announced in August, will create Australia's largest network of mortgage brokers. The combined entities have more than 6,500 brokers and FY19 mortgage settlements of $76 billion. Set to complete in the first half of 2020, Connective shareholders will receive $60 million in cash and 30.9 million AFG shares if the deal proceeds.
The debt portion of the deal is to be financed through a facility with a major Australian bank at an annual interest rate equivalent to BBSY plus 3.65%. The facility has a five year term with 50% of the principal to be amortised over 5 years with a bullet repayment of the remainder at the end. Gearing levels will be 1.0 x debt to FY19 EBITDA for the merged group.
The AFG share price has spent 2019 in recovery after falling to below 90 cents in February. Fears that commissions could be banned following the release of the final report of the Royal Commission caused the stock to nose dive, however it has since recovered.
Investors were unsettled by the ACCC's pending review, with AFG shares falling 10 cents from $2.56 to $2.46 at close of trade yesterday. The ACCC will need to approve the transaction before the two broking behemoths can merge. The merged group would have a $163 billion loan book with $706 million of reported revenue in FY19.
AFG finished FY19 with 660 million in revenue and NPAT of $33 million. Earnings per share were 15.2 cents and a full year dividend of 10.6 cents was paid. The dividend yield on AFG is currently 4.3%.
Connective has lower revenue figures to AFG due to its predominantly flat fee revenue model where 100% of commissions are paid to brokers. Connective, however, has more than 3,600 mortgage brokers to AFG's 2,975. On a pro forma basis, the combined group would have delivered reported NPAT of $44 million in FY19 and underlying NPAT of $38 million.
If the ACCC approves the transaction AFG will become the largest mortgage aggregator in the country. To do so, the ACCC will need to decide that the merger will not have the effect of substantially lessening competition in the market.
Foolish takeaway
Judging by the market's reaction to the merger announcement, AFG shareholders are eager for the acquisition of Connective to proceed – AFG shares jumped nearly 12% when it was announced. The combined group would have massive market power, which may be exactly what the ACCC are cautious of.
