Latitude breaks off $250m deal for Humm's consumer finance business

Latitude breaks off $250m deal for Humm's consumer finance business

Humm founding director and shareholder Andrew Abercrombie.

The proposed sale of Humm’s (ASX: HUM) buy now, pay later (BNPL) consumer business to consumer finance giant Latitude (ASX: LFS) has been terminated by mutual consent.

The deal’s collapse follows yesterday’s warning from Humm that its BNPL business remains under significant pressure, with cash net profit after tax plummeting 61 per cent over the fiscal year-to-date to May. 

Comprising $35 million in cash and 150 million Latitude shares, which equated to $335 million in full consideration when the sale price was initially agreed but is closer to $250 million based on yesterday’s closing share price of $1.40, the deal was due to be put in front of the Humm’s shareholders for approval next week.

Humm chair Christine Christian AO reiterated her and the board’s support for the deal only yesterday.

“The trading environment is very tough for Humm consumer finance (HCF), with intense competition, rising interest rates, and weakening consumer sentiment. HCF has experienced a reduction in net receivables, net yield compression and higher expenses,” Christian said.

“As a result, profits are materially lower as compared to this time last year – year-to-date cash NPAT is down approximately 61 per cent. Without enhanced scale, which the Latitude transaction will deliver, the outlook for HCF will be even more challenging.”

HUM shares have fallen by around 40 per cent over the past five days, pulling the company's market capitalisation down to around $183 million - a level below what the HCF sale would have been worth.

Humm founding director and shareholder Andrew Abercrombie has been a dissenting voice on the board. Believing the deal undervalues HCF, he has built up his shareholding (which currently stands at roughly 22.5 per cent) in anticipation of voting against the proposal.

On Wednesday, Humm took the unprecedented step of releasing a statement addressing Abercrombie’s criticisms of the offer.

The statement confirmed that the BNPL business is not profitable and HCF is not growing, with the majority of Humm directors believing that HCF faces significant macro and structural headwinds, with the entire BNPL sector under pressure.

Humm’s BNPL business reported a cash NPAT loss of $9.7 million for the six months ended 31 December 2021, which most of Humm’s directors believe is only likely to be amplified by increasingly challenging economic conditions and HCF’s lack of scale.

Preliminary financial results released at the end of May confirmed HCF had also not been profitable in the four months to 30 April.

Dismissing Abercrombie’s assertion that Latitude’s offer “grossly undervalues HCF”, the statement pointed to independent expert Kroll’s assessment of the proposal, which concluded the price was “fair”.

Christian warned that there was a material risk that Humm’s share price would fall significantly if the Humm shareholders did not approve the HCF sale.

Sydney-based Humm’s consumer business is an established brand in New Zealand and Australia, with more than 2.7 million customers and 60,000 merchant relationships.

The company had planned to retain ownership of commercial business, flexicommercial, and remain a standalone ASX-listed entity.

“Humm’s commercial business continues to grow strongly, with volumes, net receivables and cash NPAT well above the same period last year. Net receivables are up 70 per cent compared to May 2021, with year-to-date volumes up 105 per cent,” Christian confirmed.

“The board and management remain excited about Commercial’s prospects as a standalone business.”

Melbourne-based Latitude released a statement thanking Humm and its board for considering the offer to acquire HCF.

“BNPL represents less than one per cent of Latitude’s revenue and receivables. Latitude Group is experiencing good organic volume growth, is profitable and well capitalised to execute on a number of opportunities ahead,” the statement read.

Shares in Humm (ASX: HUM) have dropped 14.78 per cent to $0.49 as of 10.52 am AEST and have dropped 32.23 per cent during the past five days.

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