Just When Neil Woodford Thought It Couldn’t Get Worse

(Bloomberg Opinion) -- Things can always get worse. As Neil Woodford battled to contain the fallout from gating his flagship fund, the famous stock picker endured another setback on Tuesday as subprime lender Non-Standard Finance Plc’s hostile bid for larger rival Provident Financial Plc foundered.

Woodford’s firm is a big holder in both stocks and had backed the union. That financial regulators would block the deal is an unexpected twist, and unfortunately timed for him.

The tie-up appeared to be in the bag, even if other shareholders objected. It had the support of Woodford, Invesco Ltd. (his former employer), Marathon Asset Management and others with a little more than 50% of the troubled target. That grouping also owns a majority of NSF, which is led by former Provident CEO John van Kuffeler.

Aggrieved at the value destruction overseen by Kuffeler’s successors at Provident and sore from funding a rescue rights offering, the three main sponsors’ position was understandable.

They wanted to put the old band back together and return Provident’s focus to face-to-face doorstep lending after a disastrous effort to introduce computers. Debt collectors have a relationship, of sorts, with the borrower that can give them an advantage over a robot when chasing payments. The deal would also have meant NSF’s largely illiquid shares would have been melded with Provident’s bigger register.

For Provident’s other shareholders, the deal was a tougher sell. It brought exposure to some of NSF’s riskier businesses yet there was no compensating premium. There was also the feeling that this was a stitch-up by a coterie of shareholders who straddled both companies – even if the group's economics were largely aligned with the Provident minorities.

The opposition proved decisive. Had NSF won control, it would have had to keep Provident listed with a sizable minority holding. Its accounts would have fully consolidated the acquisition and made a deduction for the minorities, leaving the acquirer undercapitalized. Intuitively, that feels strange. No cash was leaving the business. Provident would have been a separate listed entity with seemingly the same loss-absorbing capital as it has now. But the regulator’s decision is final.

NSF has learnt the hard way that hostile deals in financial services are incredibly hard. Capital is a scary issue and Provident naturally made a beeline for it in its defense. It worked. A combination with NSF would have made sense if the two sides had been able find common ground on strategy; a recommended deal would have surely overcome the capital snag. Had NSF only sweetened its proposal slightly, Provident would have been under huge pressure to engage.

So this isn’t a thumping victory for Provident CEO Malcolm Le May. A majority of his shareholders by value wanted the deal. Wednesday’s rally in the shares only returned them to their level before the bid – still more than 80% below the 2015 peak. The suffering of Woodford, Invesco and Marathon goes on.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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