Blue: More credit consolidation

"The NCA played a major role in this transaction and many more to come in the next two years," Blue CE Dave van Niekerk told Fin24.com.

This was after the company announced an R278m bid for fellow AltX-listed micro-lender, Credit-U (formerly Kagisano). The acquisition will be settled half in cash and the other half in Blue equity.

"The act puts more pressure on the smaller lenders as it regulates and put caps on the fees they charge."

He says the industry needs to have access to cheaper funding and economies of scale to remain viable.

Blue has itself experienced the pressure on margins as a result of lower admin charges only too well.

In the year to February 2008, Blue reported a pre-tax profit of R17.9m from revenue of R109m in SA. That figure compares unfavourably to the pre-tax profit of R35m on R80m revenue in the year to end-February 2007.

However, the NCA is not the only reason for the consolidation Blue foresees. "The banks and insurance companies are also venturing into the industry as they have challenges with the trading environment in their traditional businesses," says van Niekerk.

He cites the example of Old Mutual, which only last month bought 27% of Real People. This is a micro-lending business head-quartered in East London with 112 branches in South Africa and a few more in four other southern African countries.

Asked why the transaction with Credit-U specifically, as opposed to the other micro-lenders, van Niekerk says Credit-U is "the better and bigger company. It was too good an opportunity to pass up," says van Niekerk.

At the purchase price of 240c/share, Credit-U will be bought for an earnings multiple of 6.5 while Blue is trading at 50 times its earnings multiple.

He also didn't want Credit-U's branch infrastructure of 92 branches and R280m debtors' book to fall into the hands of industry outsiders as that would have meant more competition for his firm and other industry players.

Says van Niekerk: "This lessens competition from bigger and more established (financial services) companies."

Van Niekerk says Credit-U can make so much money if it had access to cheaper funding. He hopes to pass on Blue's cheaper funding model to Credit-U.

"We'll lessen its lending costs and make more money." Credit-U currently pays prime plus 6% for its funds while Blue pays prime minus 1%.

It also has stronger backers and partners in the form of 20% shareholder US investment house AIG and 10% shareholder, the World Bank's International Finance Corporation (IFC).

The transaction also cements Blue's position as Africa's largest micro-lender (with about 200 branches in 12 countries) and South Africa's third biggest after African Bank and Capitec Bank.

"This does it for us now in South Africa," says van Niekerk.

"We'll only grow organically and won't be part of the consolidation."

- Fin24.com