P&N banks on mutual attraction

Police & Nurses Credit Society has upped the ante in its takeover defence against Home Building Society by announcing a valuation of at least $420 million, or $6,000 per member.

However, P&N members looking forward to a bumper payout are likely to be disappointed, with Home’s takeover offer more likely to be worth about $3,500 per member.

P&N has also announced a doubling of its 2006 net profit to a record $20.1 million, allowing chief executive Fred Huis to claim it had outperformed all other state-based financial services providers and credit unions, including Home.

P&N’s sharp profit lift compared with Home’s commendable 62 per cent jump in net profit to $10.1 million.

Home’s merger partner, StateWest Credit Society, has reported a less impressive result, with its ‘normalised’ net profit increasing fractionally to $7.25 million after adjusting for merger costs and a computing system conversion.

While highlighting P&N’s strong performance, Mr Huis has also characterised the hotly contested takeover as a battle between mutual societies, which put members first, and listed companies whose “customers are exploited to pay shareholders”.

It remains to be seen whether P&N’s shareholder members attach as much weight to its mutual status as they do to the prospect of a big takeover offer.

Home has announced plans to submit a written takeover proposal this month.

Mr Huis has set the bar at a high level by claiming P&N’s value would be at least $420 million “before factoring in the benefits of mutuality and the potential synergies of any merger”.

Home, chaired by Tony Howarth, has not publicly responded to this valuation but can be expected to challenge P&N’s methodology.

The starting point for P&N’s valuation of itself was the price Home paid for StateWest in their recent merger.

Home’s scrip-based offer valued Statewest at $230 million, which was 31.7 times its normalised 2006 profit.

P&N has applied the same multiple to its financial services business to reach a partial valuation of $385 million.

After adding in the market value of its land development and retirement home assets, it reached a total valuation of $420 million.

The 31-times multiple is nearly double the multiple at which most regional banks trade on the ASX.

It is also much higher than Home’s original valuation of StateWest.

When Home launched its offer for StateWest, in August last year, it valued the target at $120 million, or 17 times earnings.

The independent expert’s report used in the takeover also accepted this was an appropriate earnings multiple for valuing a credit society.

After announcing its offer, Home’s share price doubled, as the market responded positively to the prospect of substantial merger synergies, estimated by brokers to be worth about $10 million, and an upgrade in Home’s profit outlook.

As a direct result of Home’s soaring share price, the implied valuation of StateWest also soared higher.

If Home’s bid was based on the 17-times valuation, Police & Nurses would be worth a more modest $240 million, or about $3,400 per member.

The challenge for Home is that Mr Huis has already set the expectations for P&N members, who have been told they should expect at least $6,000.

He has also stated that this valuation of P&N does not factor in potential merger synergies, yet he has drawn from a StateWest valuation that clearly does include the expected value of synergies.

Looking at P&N’s own prospects, Mr Huis said he expected its 2006-2007 profit to be similar to last year’s record result.

The profit from it financial services business would be boosted by its growth and the absence of computer system expenses.

Mr Huis said annual profit from its land development activities would continue at about $5 million pre-tax for the next two years, while annual profit from its nursing home would be about $3 million pre-tax.