Click go shears - Kinghorn's tasty RAMS rump leftovers
Sydney Morning Herald
Wednesday March 23, 2011
JOHN KINGHORN has tabled a low-ball cash buyout to long-suffering shareholders in the failed RAMS home loan group in a move that will deliver control of the group's profitable rump to Kinghorn and his son, Geoffrey.Mr Kinghorn will use up to $243 million of shareholder money in a share buyback to tighten his grip on the company he founded, now called RHG Ltd, leaving him poised to claim the lion's share of nearly $160 million in assets that will not be returned to shareholders and the company's handsome profits.RAMS became a high-profile victim of the credit crisis in 2007 just weeks after its float, a float that earned it the moniker of "maybe the worst float of the decade" from the The New York Times.Unusually RHG has said it will open a share buyback program from mid-next week, nearly a month before shareholders even have a chance to vote on the proposal. The tight timeframe for the opening also leaves little time for dissident RHG shareholders to call a meeting to knock down the plan.Under the plan, RHG will return 88€š per share. But this is as much as 33 per cent below the valuation prepared by a paid consultant who valued the stock at between 96c and $1.31, and below yesterday's closing price of $1.03.Mr Kinghorn, who controls 11 per cent of the company, will not participate in the buyback, while his son Geoffrey, who controls 12.5 per cent, will keep the bulk of his stake.The combined Kinghorn family stake could rise as high as 80 per cent under the buyback. After the buyback they plan to de-list the company from the ASX.Mr Kinghorn, who pocketed $650 million from the float of RAMS, and his son are likely to emerge with control of the highly profitable $4.6 billion loan book. The deal also leaves open the door for a return of RHG to the home lending market by writing new loans when financial markets improve.Last year RHG returned a profit of nearly $94 million on the back of net interest income of $142 million.As banks raised interest rates to cover rising funding costs after the credit crisis and as competition fell away, RHG was able to charge among the highest rates in the market and high fees, making the runoff of its mortgage book extremely profitable.Documents sent to shareholders yesterday revealed for the first time that RHG is the subject of an investigation by the Financial Ombudsman Service into "the level of fees charged by RHG to its loan customers".While the company will return $243 million in cash to shareholders, those who accept will be foregoing as much as 52€š per share in assets, the paid consultant, Deloitte, said.The company has a total of $405 million in assets and just $50 million in liabilities, accounts lodged with the buyback show. Net assets per share are $1.16, well above the 88€š buyback offer price.RHG said late last year that it would return capital to shareholders if it could not find a buyer for the loan book.An Intelligent Investor analyst, Steven Johnson, said plans to cut future dividends and de-list the company after the buyback was tantamount to "a gun to shareholders' heads"."I think the business is worth $1.50 a share and every shareholder he buys back at 88€š adds to that value," Mr Johnson said. "Minority shareholders are getting a bad deal. He [Mr Kinghorn] is going to do very well out of this."Karl Siegling, of Cadence Capital, said while it was possible Mr Kinghorn could start writing new loans, the business remained profitable enough without the need to.Mr Kinghorn did not return calls seeking comment.In a letter to shareholders, Mr Kinghorn said advisers failed in a global search to attract a "willing" buyer for the business "at any price". He said the RHG loan book would become uneconomic in 2015 and shareholders faced the prospect of running down home loans over two decades.Deloitte, which had been hired by RHG to review the offer on behalf of investors, cautioned that there were a number of risks in not participating in the buyback.Among these were the prospect that RHG's bankers may not renew funding. This could trigger a default event and lead to some of the mortgages being seized by banks. There was also a risk that some loans could become unprofitable over the next few years if funding markets did not reopen.An RHG independent director, John McGuigan, a co-investor with Mr Kinghorn in the failed Krispy Kreme doughnut chain, said "it is desirable" to give shareholders the chance to sell their stake given "the company's significant cash surplus and the board's view that it is impractical to re-enter the Australian mortgage market in the foreseeable future". He also stressed the "potential tax benefits" from the scheme.While RHG has been locked out of the residential mortgage-backed securities markets since the onset of the global financial crisis, any substantial thawing of these markets could provide a funding boost and a potential profit windfall.RAMS floated at $2.50 a share in July 2007. But when short-term money markets froze in the credit crisis it was unable to fund its mortgage book. The business was broken up and parts sold to Westpac.
© 2011 Sydney Morning Herald
