Bumpitrage trade in Norwegian Finans - higher bid incoming?
Indicative bid 100 NOK, stock price 96 NOK
Norwegian Finans Holding (NOFI) is the holding company of Bank Norwegian, the largest consumer loan provider in the Nordics. They are currently under a self-merger procedure, i.e the holding company will be merged into the operating company and name change to Bank Norwegian (BANO). This could help ease a future redomiciling of the company away from Norway, something which would immediately unlock several billions of NOK due to more lenient capital buffer rules.
If you want to a more qualitative overview of NOFI the company, you can check out this VIC write-up from 2018. From here on out I will describe the current situation and what has led up to it and assume that you are broadly aware of what NOFI is and does.
A possible redomiciling of NOFI has been a recurring theme for a while. A few years ago an activist fund suggested this, was rebuffed and swiftly sold out their shares. A move would be relatively straightforward and has been successfully executed by other Norwegian banks.
In the summer of 2019, the crisis-ridden Norwegian Airlines, out of which NOFI was originally founded and with which it still shares a close association, had to get rid of their last remaining shares to raise funds for operations. Consequently, NOFI got new main shareholders in the Finnish insurance giant Sampo and famed private equity firm Nordic Capital, through their JV Cidron.
As it happens, Cidron is also the owner of Swedish Nordax after taking it private in 2017. In March of this year, Nordax launched an indicative bid of 95 NOK for NOFI. It was immediately heavily panned by large minority shareholders as too low and the board did not grant due diligence access to the bidder. It all seemed very opportunistic; NOFI stock had been a laggard for no obvious reason. The offer was withdrawn, but the story would not end there. A price anchor had been established, and this against a heavily lagging share price.
Shortly after NOFI went ex-dividend of 5 NOK, Nordax came back with another indicative bid of 100, raising their offer in effect 10 NOK. This time the board granted them due diligence access. Ever since, no news on the Western front and the share price has stagnated.
In the last few months, NOFI has sold off a Danish defaulted loan portfolio with no negative earnings impact, further confirming - at least on the margin - the accuracy of their accounting assumptions.
At the end of June, Tine Wollebekk, NOFI’s CEO of 4 years, abruptly announced her forthcoming exit. In the first press release this was communicated:
Wollebekk has a notice period of six months. She will stay on as CEO during this
period and continue to support the Board of Directors of Norwegian Finans
Holding in relation to the indicative offer announced by Nordax Bank AB 3 May
2021.
As it happens, it was revealed that she was leaving for the much smaller KKR-backed competitor Avida Finans. Subsequently, she was relieved of duty by the board due to conflict of interest concerns. But why was she taking a “step down” from her position at NOFI? An idea is that she doesn’t expect NOFI to stay independent much longer and that she would either be demoted within the organization or be out of a job shortly anyway.
Meanwhile, credit conditions seem completely thawed and more and more the Nordics show no actual impairments from the Covid crisis. Oil has rebounded heavily, which makes economic conditions in Norway rosier. The share prices of Swedish listed competitors TF Bank and Collector have significantly outperformed NOFI year-to-date, despite the bid providing a big one-time bump. The 100 NOK bid is not valuing the company at a premium to those companies on current earnings multiples, giving no credit to the immediate release of capital equivalent to about 15% of NOFI’s current market cap, as soon as the combined entity would fall under Swedish regulation. It would essentially be a private takeout of the largest player in the space with the most potential of international growth (Germany and Spain will be launched in the fall) - at a negative premium.
According to the indicative bid, Nordax would be content with 50.1%, presumably making NOFI into a Nordax subsidiary and having it fall under Swedish jurisdiction. Is this achievable at 100 NOK? They already have 22% secured via Cidron, but no other party has indicated acceptance. So that is highly doubtful. And would owning just half be the most effective, having to share the spoils of the jurisdictional arbitrage with outsiders and not achieving significant cost-side synergies? I’m not inclined to think so.
I see three plausible ways forward.
The first one is a raised cash bid, ultimately taking Nordax above the critical 90% threshold. Financing is not likely an issue. Sampo is keen on exiting their remaining 12% holding in Nordea and probably wants to allocate some of the funds back into this “fintech disruptor”. Nordic Capital is steadily raising more money from clients.
What number would suffice? Judging from what some NOFI investors have told Norwegian media, applying a grain of salt and taking into account recent peer performance, I think 115 NOK would get it done this fall. But if things keep improving and NOFI can convince the market that credit woes are behind them, this might be on the low side ultimately.
The second one is not a cash bid, but a share merger with Nordax, backdoor listing of the combined entity and then a capital raise from Cidron to shore up the new entity. This achieves the objective of listing Nordax, which was surely in the cards sooner or later anyway. It could be less immediately gratifying for NOFI shareholders, but on the other hand it creates a clear large Nordic consumer lending leader, likely listed on the way more visible Stockholm exchange, as a large cap company. It might remove some investor stigma around the sector, attract more international capital and promote the new company as a digital growth story.
The third one is the least exciting alternative, a muddling through. No concrete bid materializes in the near term, or the 50.1% is reached with the 100 currently under consideration, followed by a standoff. I don’t think this would be a catastrophe barring some nasty credit quality surprise. The bid put would linger in some form, and undisturbed peers have outperformed NOFI’s share price anyway. A no-bid situation would be highly suboptimal from a capital allocation standpoint, as it would either leave NOFI stuck under Norwegian regulation or having to find another suitor (unlikely with this controlling shareholder) or themselves doing the redomiciling, which would likely be a somewhat more arduous process. If we ignore the price issue, the merger path is clearly more rational for all involved.
No matter what happens, I think NOFI represents a relatively safe bet with some good upside potential. It’s a high uncertainty, low downside dynamic. The current pricing at a small discount to the current indicative bid, which by most accounts won’t be high enough to secure the takeover, seems too conservative.
Obviously, as in all investments, things can go wrong. On a company-specific basis, credit losses could rise again. Or macro-economic trends could worsen. And Norwegian markets are after all the Wild West of Scandinavia.
Next stop is the Q2 earnings report on 14 July, where the company will break over two months of silence.
EDIT: An observant reader thankfully alerted me on the change of acceptance level between the bids. The revised offer stipulates the option of lowering it to 2/3 acceptance, not 50.1%.