Richard Inder: Liberty in the driver's seat

Liberty Financial's acquisition of a 10 per cent stake in Mike Pero Mortgages should be viewed as a break for freedom by the Australian lender in New Zealand.

Liberty's lightning raid on the Mike Pero share register a little over a week ago has frustrated the ambitions of rival New Zealand Finance, which has a controlling 55 per cent stake and is bidding another $1.05 a share for the remainder.

Typically, investors would regard Liberty's move as a precursor to an auction. Liberty would block NZF from reaching 90 per cent, the threshold where NZF could compulsorily acquire the outstanding shares. The two would then enter backroom talks over what price was acceptable, before NZF launched another bid.

This will not happen.

For one, Liberty's managing director, Sherman Ma, told the Business Herald: "That is certainly not the case. We have not ever taken short-term positions in things, it has always been for the long term. We think we can bring some benefits to the organisation. We are by no means looking at an exit."

Such utterances are rightly viewed with scepticism in contested takeovers, but this time there are strong grounds for taking Ma's assertion at face value.

Liberty was facing a serious threat to its ambition to expand in New Zealand if it did not block NZF.

Liberty provides finance to the non-conforming borrowers, the builders and plumbers who have not kept their accounts up to date, former waywards who declared themselves bankrupt when they were students - people who fall outside banks' normal lending criteria.

These people, which according to Liberty represent as much as 10 per cent of the mortgage market, are most in need of advice on the universe of lenders outside the traditional sources.

The people who provide this advice are mortgage brokers, of which Mike Pero is the largest with an estimated 30 per cent share of the New Zealand market.

(Those on a good income with a decent credit history and a reasonable standard of education can negotiate with the main banks just as easily as a mortgage broker. The rates and terms they get with major trading banks are likely to be more competitive than rates offered by institutions such as Liberty, which demand a premium to banks to offset the additional credit risk.)

By taking a controlling stake, Liberty has bought an insurance policy that the Mike Pero directors act on an arms-length basis with it as well as the other lenders who provide finance to Mike Pero's customers. It will not make a rival bid because it has no chance of getting more than 50 per cent without NZF's agreement.

NZF is also a big lender to Mike Pero's customers.

Its mortgage book, between March 2004 and March 2005, grew 56 per cent from $39.5 million to $61.5 million. Meanwhile, it has a complementary business in New Zealand Mortgage Finance, expected to write around $1 billion of loans in the year to June.

Even if NZF had succeeded in getting full control of Mike Pero, it probably would have continued to use Liberty as a funding source. Liberty is big, and can offer better rates than smaller competitors.

However, full control would have allowed NZF to offer Mike Pero customers more favourable terms on its loans. It could sacrifice margins on its loans to build the customer registers of both operations.

Now , such sweetheart deals are off. Mike Pero directors must now ensure that any deals with either NZF or Liberty do not breach the NZX listing rules on related party transactions.

These require Mike Pero to seek shareholder approval if a deal involves assets of more than 5 per cent of Mike Pero's market value, or services worth more than 0.5 per cent of the market value. In such situations the related party - Liberty or NZF - would be prevented from voting.

In short, Mike Pero must continue to behave as an independent entity even though two of its suppliers sit on its share register.

The stake is a blow to NZF's ambitions. The acquisition of Mike Pero may have helped it shift its growth up a gear. Now it must forgo these benefits as well as any savings obtained by de-listing Mike Pero from the exchange, worth as much as $750,000 a year.

To put it mildly, NZF will now have to rethink its plans for Mike Pero, but the alternatives are unclear. The related party rules would also seem to prevent NZF and Liberty reaching accommodation that would be enough for Liberty to give up its stake.

Some investors believe this may be the end for NZF.

Since Liberty's interest in Mike Pero was disclosed, NZF's shares have soared, suggesting to some that it may believe Liberty may eventually have designs on it as well.

However, for Mike Pero, Liberty's position may have a silver lining. It will miss out on the gains that come with size.

But customers can be sure that the broker will deal with Liberty and NZF on purely commercial terms. This must help borrowers get the best interest rate and terms.