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Yellow Brick Road receives 100% of acceptances for Vow Financial takeover

Published: 09:53 20 May 2014 AEST

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Yellow Brick Road (ASX: YBR) is poised to build revenues following the acquisition of privately-owned Vow Financial Holdings, one of Australia’s largest mortgage aggregators.

The deal fits into YBR's growth strategy to build the business through acquisitions, and organically, while cementing YBR as one of the leaders in the non-bank mortgage segment.

The acquisition is timely in gaining access to a massive 700 mortgage broker groups, adding to top end revenues for YBR and to earnings.

Also the deal will broaden YBR's capability in mortgages from new broker groups from which to expand its wealth management product suite.

In a major vote of confidence for YBR, Vow shareholders who accepted the consideration option of 100% of YBR shares included Macquarie Bank (ASX: MQG) a 19.7% shareholder in Vow and an existing 14.8% shareholder in YBR.

Also accepting this option was Trelayne Brown Pty Ltd, a company controlled by Tim Brown, the Chief Executive of Vow.

Brown said that the retention of all of Vow’s existing staff should lead to a smooth transition to the new ownership by YBR and to the acceptance by brokers and lenders of such new ownership.

Mark Bouris, YBR chairman, commented: “We are very pleased to welcome the Vow shareholders to the YBR register and we share their excitement as to the combined group’s future.

"We are also proud to welcome the Vow brokers into our network and we look forward to working with them to build revenues and growth opportunities for the future.

“We do not intend to disturb the operational structure of Vow. It will operate as a separate division within the YBR group, with Tim Brown remaining as its CEO."


Acceptances

YBR has now received irrevocable acceptances from all 24 Vow shareholders to acquire 100% of their shares, valuing the aggregator at $17.6 million.

Importantly for YBR, by securing the acceptances the deal will be much faster to complete due to no drag-along or compulsory acquisition procedures.

The offer remains subject to a number of conditions precedent, including YBR shareholders passing various approval resolutions required under the ASX Listing Rules and the Corporations Act.

YBR will conduct a general meeting in mid-July.


Completion of the deal

Completion of the Vow acquisition by YBR is due to occur on the last day of the month during which all conditions of the Offers are satisfied or waived. At this stage, this is expected to be on 31 July 2014.

Dr Peter Neustadt, Vow chairman, commented: “This is a welcome strategic move for the Vow business.

"YBR’s marketing and product manufacturing capabilities and partners will be key assets in growing Vow’s and the Vow’s brokers’ mortgage volumes, as well as introducing YBR’s wealth management products and experience.”

Vow negotiates on behalf of its more than 700 mortgage brokers directly with lending institutions and collects up-front and trailing commissions for the loans introduced by brokers.

Vow was also the winner of the Wholesale Aggregator of the Year in 2011 and 2012 at the Mortgage & Finance Association of Australia’s Excellence Awards.


Consideration

Vow shareholders had three alternatives for consideration, including all cash or all scrip, or a mix of both set at 80% cash & 20% YBR shares.

The total consideration breakdown is:

- 36.9% in YBR shares, being 9,267,239 YBR shares to be issued at $0.70 per YBR share at Completion and comprising $6,487,077 in total value; and

- 63.1% in cash, being $11,114,498 in total cash consideration, payable as to a fixed amount of $9,834,114 on Completion and the balance of $1,280,384 deferred to be payable on the 1st anniversary of Completion.

(Subject to any net asset & working capital “true-up” adjustments as a deduction from the deferred consideration or by way of an additional payment to Vow shareholders against an agreed pro-forma balance sheet requiring the delivery of $12.3m in net assets and $1.0m in working capital).

Vow shareholders who accepted the Alternative A; 100% YBR shares option included:

- Macquarie Bank Limited, a 19.7% shareholder in Vow and an existing 14.8% shareholder in YBR; and

- Trelayne Brown Pty Ltd, a company controlled by Tim Brown, the Chief Executive of Vow.


Analysis

The importance of this acquisition is that it brings in a profitable business that will give YBR a new national broker distribution channel.

Achieving 100% acceptances to the offer is also important as there are no drag-along or compulsory acquisition procedures which costs time and resources.

The deal should grow Vow’s and its brokers’ mortgage volumes, as well as tapping YBR’s wealth management products and experience to increase top line revenues for Vow and for YBR and increase earnings proportionately given 100% acceptance of the offer.

A key feature is the significant Vow shareholders who accepted the shares in YBR offer alternative; namely Macquarie Bank Limited, a 19.7% shareholder in Vow and an existing 14.8% shareholder in YBR; and a company controlled by Tim Brown, the chief executive of Vow. This sends a message to investors as to following where these holders have their money - in YBR shares. 

Also the deal will broaden YBR's capability in mortgages from new broker groups from which to expand its product suite.

Proactive Investors recently initiated coverage on YBR and provided guidance on our valuation and share price target of $0.73 to $0.97.

We believe this will prove conservative and we consider YBR to be one of our top picks of 2014 in the industrial sector.

 

Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX “Small and Mid-cap” stocks with distribution in Australia, UK, North America and Hong Kong / China.

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