Elliott's U.K. Fixer-Upper Gets Another Lift

(Bloomberg Opinion) -- For a company owner, a clean sale is usually preferable to the rigmarole of going public. But Elliott Management Corp.’s decision to sell shares in Charter Court Financial Services Group Plc in 2017, rather than find a buyer at any price, looks to have been vindicated: the U.K. specialist lender is close to pairing up with rival OneSavings Bank Plc at a much higher valuation.

The ubiquitous hedge fund invested in a crisis-stricken mortgage provider in 2008 and built it into Charter, targeting bridge finance and second-charge loans and other parts of the market vacated by the U.K.’s retreating mainstream banks.

The lack of premium in the outline terms betrays the limited immediate value the planned tie-up will create. Cost savings have yet to be detailed, but are unlikely to be significant given the lack of overlap between the pair. That in turn limits what OneSavings could justify paying over Charter’s standalone value. Shares of both companies jumped 10 percent on Monday, valuing the combination at 1.8 billion pounds ($2.3 billion), or 150 million pounds more than on Friday.

Charter investors will own 45 percent of the combination, roughly in line with the lender’s contribution to overall net income. That seems fair. But the stars seem to have aligned to make this stack up. Mash the pair together at their valuations in February and Charter investors would have owned only 42 percent. A merger at the companies’ relative sizes on the day of Charter’s IPO would have given them only 36 percent.

There’s some defensive logic to the union. The Bank of England’s Term Funding Scheme is over and Brexit uncertainty is weighing on U.K. residential lending. The bigger company will have a more diversified funding base, combining OneSavings’ deposit base and Charter’s established access to securitization markets. That is probably enough to justify this.

The lack of a premium and the lowly valuations of these businesses on a price-earnings basis – both trade on just seven times estimated earnings – would normally be an invitation to counter-bidders. Even incumbent Lloyds Banking Group Plc trades on a higher earnings multiple. But don’t expect a long list of buyers eager to add to their exposure to the U.K. housing market.

Elliott looks to have done well from the investment. Still it hasn’t been able to cash out yet. Just as the IPO may have been the best option in 2017, a nil-premium deal may be the best alternative in 2019.

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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