Cash Converters acquires UK franchisee Capital Cash for $24.7m

As it transitions away from offering some of its payday loans, Cash Converters (ASX: CCV) has announced it is acquiring its largest UK franchise store network Capital Cash in an all-cash deal worth $24.7 million.

It comes four months after the group purchased 75 per cent of its New Zealand enterprise for $15.5 million, having already held the remaining 25 per cent in equity interest before the deal.  

Capital Cash is the largest franchisee for Cash Converters in the UK, with 42 stores across England that offer pawnbroking, buyback and retailing of second-hand goods.

The franchise emerged from the impacts of the COVID-19 pandemic with an underlying FY22 EBITDA of £2.9 million (AUD$5.1 million) and net tangible assets of £5.5 million (AUD$9.8 million).

Under the agreement, Capital Cash managing director Carl Murray will become CEO of Cash Converters UK and focus on realising growth objectives in the country, including further franchise store acquisitions and a measured plan for greenfield store site expansion.

The takeover is expected to be finalised in mid-2023.

“We continue to assess opportunities to invest our capital sensibly, to generate value for our shareholders,” Cash Converters managing director Sam Budiselik said.

“I would like to take this opportunity to thank the Capital Cash team for the investment made in establishing our brand in local markets over twenty years, as we now look forward to consolidating and growing a corporate network of stores across the UK.”

The news comes one week after Cash Converters announced revenue grew by 24 per cent to hit $142.4 million in the December half due to increasing volume across all loan books and store trading improvements.

Operating net profit after tax (NPAT) reached $10.5 million, reflecting a 36 per cent increase as the contribution of its international segments in New Zealand and the UK grew.

However, the group noted a goodwill impairment of $110.5 million after acknowledging the impact of the Financial Sector Reform Act 2022 – a legislative change that will focus on the enhanced regulation of Small Amount Credit Contract (SACC) loan products offered by Cash Converters.

SACC is a government-regulated product under the National Consumer Credit Protection Act 2009 and is defined as being a loan of no more than $2,000, set up to be repaid over a term of not less than 16 days and not more than a year.

Previously, the protected earnings amount (PEA) rule said that if a consumer received at least 50 per cent of their gross income from social security payments, 80 per cent of their income was protected and could not be used to repay a SACC. Coming into effect from June 2023, the new legislation extends the PEA to all consumers.

In the December half, the SACC segment contributed $82 million to Cash Converter’s $255.9 million loan book, growing by 19 per cent in the period.

Cash Converters said it will be transitioning away from the SACC product sitting within small loans due to the legislative change.

“Whilst uncertainty exists as to customer behaviour resulting from these changes, our customers’ need for cash does not,” Cash Converters said to shareholders on 27 February.

“If anything, the need is growing with Australians struggling to manage household budgets in an inflationary environment.

“We remain focused on assisting our customers with this transition and confident that where suitable, we will be one of the few lenders offering longer term products with lower re-payments.”

Last month also saw the Australian Transaction Reports and Analysis Centre (AUSTRAC) accept an enforceable undertaking (EU) from Cash Converters after an investigation highlighted issues with the company’s anti-money laundering and counter-terrorism financing program.

The probe found Cash Converters did not include sufficient detail on important components such as transaction monitoring and customer due diligence, but noted the company has undertaken significant work to improve its compliance.

Shares in CCV are down 2.13 per cent to 23 cents each at 11:29am AEDT.