Martin Hawes: Allied deal is optimal

A pensioner who, for the past five years has had their retirement savings of $25,000 invested with United Finance, asked if they should vote in favour of the proposal from Allied Farmers to acquire the finance assets of United.

They had been sent a prospectus but did not understand the jargon.

The basics of the proposal are that if it is agreed to, investors in United will end up with shares in a listed company (Allied Farmers) instead of the deposit that was their initial investment.

Effectively they are being asked to swap from a fixed interest investment to a share investment.

Becoming a share investor is a great departure from what they originally intended - they were no doubt looking for income from their United investment.

Ultimately the way investors vote comes down to who they believe will be best able to collect the loans the company made.

Many of these have gone bad and the amount that can be collected from Hanover and United's customers will determine what investors finally receive.

Who is likely to be best at collecting all those bad loans? There are three options:

1. Hanover/United could remain in control of their loan assets. This is not a starter - the directors and managers have proved they are not capable of doing this effectively and these people made these loans in the first place.

2. Appoint receivers to run Hanover/United. This is a better option, but in this case it is likely to be expensive and it is doubtful that receivers will turn out to be any better than Hanover's team have been.

3. Allied Farmers take over. Long term this will be the best option as it has every incentive to build a strong debt management team and collect as much as it can. Allied will be able to take its time and do deals to get the best outcome.

If this deal goes through and investors end up with shares in Allied Farmers, they will be able to sell them and get out. Initially they will not have much value so if they sell quickly, they will not get much back.

If they can afford to wait, the shares will rise in value if Allied does a good job. This may take years but the proposed deal means people will be able to act according to their own situations - those badly in need of some cash can get it quickly (albeit at a major loss) and those who can afford to wait can do better.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martin hawes.com