Heartland buy to lift its rural exposure

Jeff Greenslade. Photo / Natalie Slade

Newly listed finance company Heartland New Zealand said yesterday it intended to buy PGG Wrightson Finance in a deal that will heavily increase its exposure to the rural sector.

At the same time, Heartland will raise funds to ensure it has the required capital adequacy to cope with its enlarged loan book.

Heartland, which intends to apply to become a fully fledged bank this year, said it would also form a strategic alliance with the target company's parent, PGG Wrightson (PGW), to further extend its footprint in the rural sector.

PGG Wrightson Finance has been on the Government's retail deposit guarantee scheme since 2008 but will cease to be covered by the end of this year.

The company does not carry an investment grade rating from Standard and Poor's but Heartland does.

Forsyth Barr analyst John Cairns said the move made a lot of sense for both parties.

"The PGG Wrightson Finance business is finding it increasingly difficult to fund its book," he said.

"Without an investment grade credit rating, it's going to become even more difficult as it approaches the end of the year with the fall off of the Crown's guarantee scheme."

"They are in a difficult position and it is difficult to see what is going to change there," he said.

Heartland chief executive Jeff Greenslade said the move would increase his company's rural exposure to 23 per cent from 6 per cent.

"The rural sector was the area that we needed to grow in order to get up to the same levels in portfolio exposure that we have in the other areas."

Under the deal's terms, Heartland will buy the business at around its net tangible asset value of about $100 million and will sell back the loan it does not want to PGW for $90 million.

The net payment is expected to be around $7.5 million.

Greenslade said the acquisition meant the company's existing capital would be stretched across a larger loan book, which would result in a percentage of its capital going down, "so we are raising some capital to get our capitalisation back up to where we would like it to be, post the acquisition".

There will be two share placements to raise $20 million, with the remaining $35 million to be raised from a share purchase plan or other mechanisms.

"We have picked up the bits that we like and which suit our strategy," Greenslade said.

"We are also very happy with the risk profile that we are buying so we are picking up what we think is a very clean and robust book," he said.

The deal is subject to conditions.

Heartland shares, which have been trading in a wide range since they debuted on the NZX on February 1, closed yesterday at 74c, up 2c.