Ann: HUM - hummgroup financial position update, page-21

Inside the Humm-Latitude fiasco

Ayesha de KretserSeniorReporter

Jun 24, 2022 –4.00pm

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The clock was ticking. Humm Group founder AndrewAbercrombie had just five days leading up to last Christmas to convinceLatitude Group’s private equity owners – led by KKR – that the group’s consumerfinance assets were worth more than the $335 million offer on the table.

Latitude’s chief executive, Ahmed Fahour, andchairman Mike Tilley were also running out of time. After two failed IPOruns, Latitude had finally succeededin listing – but its limited free float meant it couldn’t crack the ASX 200. The mostly scrip offer would give it Humm’s register and its private equity owners the exit they had been seeking.

Flexigroup founder and Liberal Party heavyweightAndrew Abercrombie. David Rowe

Abercrombie was open to doing a deal to sell Humm’sassets, spanning everything from credit cards, instalment pay for big-ticketitems, and buy now, pay later for small purchases.

He insists he was not being a typical founder withoverblown ideas about his company’s worth. But it had to be sharper than the$35 million cash and 150 million new Latitude shares that had been brokered byhis fellow Humm director, the formidable investment banker and Melbournefinance heavyweight, John Wylie.

Together with Humm’s chief executive, RebeccaJames, Abercrombie worked around the clock in those five days before Christmasto pull together the numbers to convince KKR’s Australia boss, Scott Bookmyer,to stump up a better deal. This effort ultimately proved futile and themajority directors pressed ahead with Latitude’s offer after the only otherinterested party – Bank of Queensland – walked away.

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There are many explanations why Latitude and Humm’smajority directors thought they did not need to win Abercrombie’s support, eventhough he was Humm’s biggest shareholder with 20 per cent.

What is indisputable is that a calamitous boardroomfalling out between Abercrombie and Wylie has triggered a downwards spiral forboth Latitude and Humm, culminating in the Humm board’s majority directorsresigning on Tuesday. The shares of both companies languish at or near recordlows after the deal went spectacularly wrong.

On December 20, Abercrombie, who is perhaps betterknown as a Victorian Liberal Partypowerbroker and for hosting a party that was thought to spread COVID-19 after atrip to Aspen in March 2020, had been ambushed in the boardroom and told to vacate the chair for Christine Christian.

Christian is the well-respected architect ofDunn & Bradstreet’s management buyout and chairman of Melbourne’sprestigious State Library, a position vacated by Wylie in 2021. She is also the chairman of Tanarra Capital, the $2 billion investment company of Wylie.

Between Humm’s investor day on October 27 and theLatitude approach, Abercrombie believed that the board was – as disclosed inthe presentation – resolved to selling its New Zealand commercial leasingbusiness. An unsolicited offer had been received and an auction processcommenced. Humm would use the proceeds to finance growth in buy now, pay laterexpansions in Canada and the UK.

But during the board meeting, a new plan waspresented that would see Humm’s consumer finance assets sold off andAbercrombie pushed into the back seat as a director.

Dressed up for BNPL implosion

A version of the story put forward by someshareholders is that the Humm Group – a pioneer of buy now, pay later throughits instalment pay business yet a laggard in the subsequent boom – was beguiledby Afterpay’s success and trying desperately to compete in a market that onlyrewarded growth.

Humm’s line is perhaps more rational, given themutual respect and admiration between Wylie and Afterpay founder Anthony Eisen,who was Wylie’s protege at Credit Suisse during some of the big privatisationdeals of the 1990s and 2000s.

Humm was, in many ways, damned if it did and damnedif it didn’t when it came to chasing BNPL’s success. As the value of marketdarlings Zip and Afterpay soared alongside their lofty growth targets, Humm sawthe potential that they could collapse the unit price for sales and seriouslythreaten its bread and butter – its profitable domestic consumer financebusiness. The offshore growth strategy would provide a hedge.

Months earlier, the company (formerly known asFlexigroup) had rebranded its wide array of assets under the Humm Group,chasing a re-rating that never materialised.

Abercrombie, who had baulked at an invitation tojoin an early funding round at Afterpay, was steadfast in his belief –prescient as it happens – that the sector was doomed and headed for adotcom-style bust. (Instead, Abercrombie considered making a tilt forTouchcorp, the company that eventually merged with Afterpay, bequeathing DuncanSaville, the mysterious investor who was last week revealed as one of Humm’s biggestshareholders, an accidental fortune.)

Wylie sees value

Tanarra – Wylie’s long-term value fund – sawAbercrombie’s business, which was generating steady returns from its commercialleasing arm and its credit cards and instalment pay arms, as an opportunity. Hebought 5 per cent of the group through a placement at $1.25 in February 2019and the two men united in a mission to transform an old-fashioned consumer andcommercial credit business into a market darling.

When COVID-19 arrived after a year of trying hardbut effectively running into a wall of market scepticism, sales for big-ticketinstalment pay items that are usually bought in-store, and its Flight Centrecredit cards business, ground to a halt.

“By their own admission they were late to the partyon the whole buy now, pay later thing,” says Luke Cummings, chief investmentofficer at Harvest Lane Asset Management, a shareholder.

“They didn’t get a lot of credit for having donethat, most likely because they were going about things in a more measured wayand they weren’t chasing growth at all costs.

“But having not benefited much, if it all, when thesector was booming, Humm shares were still caught in the sell-off, so really itwas the double whammy of not benefiting when times were good but also beinghammered when they turned sour.”

The rebranding attempt and pledges to grow buy now,pay later failed to solve Humm’s core consumer finance dilemma: its product mixis scrappy, often overlapping, and the fact it had relied on retailers forrevenue.

“They had to pivot towards the buy now, pay laterbusiness and use that as the customer acquisition tool because within theconsumer financing industry, the power has shifted to the consumer and not theretailer any more,” says Morningstar analyst Shaun Ler, who agrees Humm waslate to the party.

“Humm’s core product is just not competitive, it’snot there any more, so they saw the need to pivot to that techy-typeacquisition strategy.”

A tie-up with Latitude made sense, allowing twovery similar businesses the opportunity to create scale and grow customeracquisition for loans and instalment payments through the tech-based, smallerticket buy now, pay later segment.

Macquarie analyst Josh Freiman cut Latitude’s rating after the deal’s collapse, saying its prospects look less bright without the addition of Humm’s $1.8 billion receivables and 2.6 million customers in a market where scale will help offset funding cost pressures.

KKR has owned Latitude for more than six years andthe market implosion will not make its limited partners more patient waitingfor an exit strategy. Latitude declined to spell out where it will go fromhere, but stresses it has options and deep pockets.

Abercrombie’s campaign

Those in the Abercrombie camp say they advised himhe had no chance of thwarting the sale that was presented by Wylie and – theysay – brokered behind Abercrombie’s back with KKR’s Bookmyer. They hint thatWylie and Christian thought that they could, with the unanimous support of therest of the board, get the deal done.

What no one counted on was the Federal Courtslowing down the process, insisting that part two of the sale – thedistribution of Latitude’s 150 million shares to Humm shareholders – beapproved by scheme of arrangement. This pushed the voting date back to June 23and gave Abercrombie time to rally his troops.

It also gave the market time to implode, with thedeal’s value dropping from $335 million when it was announced, to $245 millionwhen it was mutually terminated last Friday. Based on Latitude’s share price inearly trading on Friday, the deal would have been worth less than $200 million.

Abercrombie told this newspaperhe had been “ostracised”, while Christian played down concerns about boarddysfunction after Abercrombie’s dissent was first revealed to shareholders in the explanatory booklet on May 18.

“We’re a professional, highly skilled board withlots of experience. We welcome discussion and debate on all items, that’s whatmakes a truly functioning board,” she said in May.

“The board will continue to work in a functioningmanner. [Andrew has] provided his views right from the start and he’s had theopportunity to contribute his views in the explanatory booklet.”

The public face was measured, but things wereundoubtedly getting heated behind the scenes. There were threats of courtaction slowing things down, as Abercrombie’s legal team led by Arnold Bloch andLeibler waged a tactical campaign.

The pitch from Abercrombie to shareholders wassimple. He felt that Wylie had done the dirty on him to secure a hasty exitfrom Humm for Tanarra. Regardless of whether shareholders supported the sale –many did – Abercrombie asked them to vote against it in early voting to send amessage to the Humm board and Latitude.

Crucially, he put his money where his mouth was andbought more Humm shares on market to boost his stake to 23 per cent under creepprovisions. Some say Wylie could have done the same, and question why he didn’tif he was so keen on the deal.

Instead of responding to shareholder pressure byasking Latitude for a higher offer, Christian released informationto the market on May 30 revealing that Humm’s consumer finance business, whichit had packaged and begun work to exit, had been unprofitable in the first fourmonths of 2022.

The wash-up

Observers credit Wylie with striking a watertightdeal that gave Latitude no room to exit even if things turned sour, which goessome way to explaining why the majority directors felt so confident talkingdown the business’ prospects while urging shareholders to support the sale.

Wylie this week released a statement in response toshareholder anger that the deal was pulled without being put to a vote. He saidhe had brought his M&A experience to bear in forging the deal.

The board has defended all statements as beingissued in the interests of transparency, rather than to frighten investors intoaccepting the deal.

Shareholders like Cummings still have questionsabout how the process was run.

“I think sidelining Drew [Abercrombie] and sayingyou’re a dinosaur, the company has had a tumultuous history under yourleadership so we’re going to do a deal without you – it underestimated theextent to which his 20 per cent would be a factor,” he says.

“My second issue is the messaging from the boardwas inconsistent and made shareholders more broadly not trust them. Then,lastly, they were far too slow to mobilise the retail shareholder base. Whenthey saw [the way institutions were voting] they really needed to find voteselsewhere.”

Christian said Humm went back to Latitude afterseeing the voting – with 50 per cent of the votes received, 78 per cent wereagainst the deal. Latitude had no interest in boosting its offer for thebusiness, where profits had declined from the $25 million to $28 million citedin the explanatory booklet, to just $17 million.

While some criticise Humm for spending millions onthe deal with no break fee, this also provided Abercrombie with room to producea second bidder. As it transpired, Latitude simply refused to bid againstitself at the 11th hour.

Shareholder and finance industry veteran LouisNiederer sums up the sentiment expressed by many after the deal was terminated:“It seems like such a petty squabble resulting in huge value destruction, withblame on both sides.

“They should have said nothing and let it go to thevote. I’m sure that a lot of shareholders who were registering a ‘no’ votewould have changed their minds, because even at $1.25 it’s not that bad of adeal,” he says.

Abercrombie acknowledges he has a hell of a job onhis hands in restoring Humm. It seems likely the buy now, pay later businesswill be put into run-off mode to conserve cash. One observer points out its NewZealand credit cards business – which Abercrombie paid $300 million for in 2016– alone is worth more than the entire company’s market value.

“I sense there’s a play coming up with DuncanSaville,” says Niederer.

“It was a contest of wills, not a contest ofeconomics.”

Ayesha de Kretser isa Senior Financial Services Reporter with The Australian Financial Review Connectwith Ayesha on Twitter. Email Ayesha at ayesha.dekretser@copyright link.au