Abbey National makes pounds 285m offer for FNFC

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The Independent Online

Financial Correspondent

Abbey National cut its dependence on the house market yesterday with a recommended offer worth pounds 285m for the consumer credit company, First National Finance Corporation.

Peter Birch, Abbey's chief executive, justified an offer that took the City by surprise: "Certainly FNFC has had a checkered history. It nearly went under twice through property lending in the early 1970s and 1980s. What attracts us is the consumer credit business which grew by 33 per cent in the last half-year. The deal will double the size of our unsecured lending business.

"The housing market is in the doldrums, but people are switching to home improvements. There are 1 million households with negative or near-negative equity. They are not moving but are putting in new garages, patios, kitchens. FNFC has been very, very successful in this area with half a million customers. It will be earnings-enhancing for us in the first year. It's a nice little earner."

FNFC's shares rose 18p on the news to close at 108.5p, while Abbey's shares fell 3p to 473p.

The offer represents a 23 per cent premium to the share price on Monday. Alex Robinson, an analyst with Smith New Court, said it represented 2.1 times book value or 80 times 1994/5 earnings. The price also represented a prospective multiple of 8.4, she said.

Abbey will continue to wind down the commercial lending and property portfolios that brought FNFC to the brink of collapse two years ago.

Abbey will take over FNFC's pounds 660m of bank debt and over pounds 700m of securitised loans. The firm's debt peaked at pounds 1.3bn after a lending binge in the 1980s, prompting a refinancing by its 120 banks in 1993.

The deal will trim 1 per cent from FNFC's funding costs, adding around pounds 10m a year to profits. The company made pounds 1.3m for the year to 31 October 1994 after four years of losses. It announced interim profits of pounds 4.3m last week, including consumer credit profits up by a third to pounds 15.5m, with forecasts of strong growth to come.

The main shareholders who must decide on the offer are Fidelity Investments, Schroder Investment Management, BAT Industries, Provident Mutual and Marathon Asset Management.

Under the deal, FNFC will operate independently but subject to Abbey's internal control systems. Tim Igram, finance director, will report directly to Peter Birch at the Abbey, while Martin Mays-Smith chairman, will retire. Abbey will appoint a new chairman.

FNFC's 1,000-plus staff will be kept on - Mr Birch envisages "no changes" - and the main City and Harrow offices will be maintained. FNFC has arrangements with more than 2,000 sources of loan business, and 55 per cent of its business is from home improvement loans.

The offer amounts to 110.5p per FNFC ordinary share, 100p per 6.3 per cent convertible preference share and 189p per 7 per cent convertible preference share.

The offer received a mixed response from institutions and analysts. Peter Toeman, of Hoare Govett, was sceptical: "It will make Abbey National a more risky institution. It's quite a full price. FNFC has gone bust twice in my lifetime which suggests it can't control its underwriting risk."

Mr Toeman said FNFC suffered higher bad loan losses in the downturn of each cycle than the high street banks because of the quality of its business.

He said that in a downturn Abbey's bad debt losses would move from 0 per cent to 1 per cent of total lending, whereas FNFC's would rise from 2 to 5 per cent.