The Board of Provident notes the announcement today from NSF regarding its receipt of acceptances in accordance with the Irrevocable Undertakings and Letters of Intent as anticipated in the NSF statement on 22 February 2019.
The Provident Board continues to have very material concerns about the strategic, operational and financial merits of the NSF Offer and is keen to ensure that all of its shareholders have full clarity with respect to the terms and implications of the NSF Offer. The Provident Board notes that the vast majority of shares subject to acceptances of the Offer to date have come from shareholders who also hold shares in NSF and who may therefore have a different perspective as to the merits of the Offer than that of other shareholders. Provident therefore requires a response from NSF on the key questions set out below.
The Provident Board continues to explore all appropriate alternatives to maximise value for all our shareholders and re-confirms that it does not recommend the NSF Offer. The Provident Board strongly advises all Provident Shareholders to take no action in relation to the NSF Offer.
How does NSF intend to address the potential funding, ratings, balance sheet and earnings impacts from a sale of Moneybarn and still achieve a meaningful capital distribution?
Who does NSF intend to appoint as the PRA and FCA approved executive in charge of running Vanquis Bank, given that Vanquis Bank will remain the largest business within the combined Group and the most significant earnings driver?
How does NSF plan to persuade the CMA that the plan to spin off Loans at Home is viable and an adequate remedy? In addition, given that NSF has not yet commenced the CMA's formal review, when does NSF expect to obtain CMA approval of the Offer and its suggested remedy?
Can NSF provide clarity for our shareholders on how you intend to address the regulatory issues highlighted in the FCA's letter to NSF dated 6 March 2019 and reconcile your plans with the levels of returns outlined in your Offer document?
We note NSF's comments in its RNS dated 25 March 2019 regarding its guarantor loan businesses. What is the potential impact on the future profitability of this business line in light of recent regulatory statements?
Did intra group transactions in 2016 properly create necessary profits available for distribution to shareholders?
Was the payment of the October 2018 dividend permissible under the Companies Act 2006 given the need to meet the 'net assets test'?
Were the distributions made in June 2018 and October 2018 covered by distributable profits of NSF in accordance with the Companies Act 2006?
Provident believes that our shareholders deserve a full written response to each of these points, given that they could have a material impact on future shareholder value.
Under the Companies Act 2006, distributions can only be made out of a company's available distributable profits. As at 31 December 2015, while NSF had cash, it does not appear that it could pay dividends because it does not appear to have had distributable profits.
NSF subscribed £11m for shares in NSF II.
NSF II subscribed £11m for shares in SD Taylor.
SD Taylor used the £11m cash received from NSF II to pay a dividend to NSF II of an equal amount.
Subsequently NSF II then paid a dividend of £11m to NSF.
The transactions referred to above suggest that the dividend was 'circular' from the perspective of NSF II. If this analysis is correct, this would mean that the £11m received by NSF from NSF II was not distributable in NSF under Tech 2/10, and so the retained deficit, as at 31 December 2015, would not have been cleared.
NSF nonetheless paid a dividend of £0.951m in 2016 (and additional distributions in 2017 and 2018).
A) Please explain how the distribution from NSF II in 2016 allowed NSF to clear its retained deficit?
B) If the deficit was not cleared, please explain how the dividend paid in 2016 and all subsequent dividends and purchases of shares made by NSF were in compliance with the Companies Act 2006?
Under the Companies Act 2006, a public company may only make a distribution if the amount of its net assets is not less than the aggregate of its called up share capital and undistributable reserves (the 'net assets test').
NSF paid an interim dividend of £1.872m in October 2018 by reference to the unaudited interim accounts for the seven months ended 31 July 2018.
Net assets at the same date of £270.791m.
On the basis of this analysis, it appears that rather than having the required surplus, there was in fact a shortfall of £0.384m which would need to have been covered before any dividend could have been paid.
Please explain how the Companies Act 2006 'net assets test' was met in the context of the October 2018 dividend?
Were the distributions by NSF made in June 2018 and October 2018 covered by distributable profits?
NSF made total distributions of £6.686m (share purchases of £1.381m and dividends of £5.305m), in reliance on the unaudited interim accounts for the two months ended 28 February 2018. Own share purchases into treasury are required to be made out of distributable profits. In relation to these distributions, it is unclear how NSF had sufficient distributable profits, as at 28 February 2018.
Cumulative retained profits of £8.273m.
Cumulative negative reserve of £2.078m in respect of own shares acquired by NSF and held in treasury (which should be taken into account in calculating distributable profits).
Cumulative reserves relating to share-based payments of £0.406m (of which £0.161m is shown as being capitalised into 'cost of investment in subsidiaries', leaving only a maximum of £0.245m which should be taken into account in calculating distributable profits).
On this basis profits available for distributions would therefore be £6.440m (£8.273m less £2.078m plus £0.245m).
Based on the above analysis, it appears that the dividend in June 2018 exceeded the available distributable profits by £0.246m. This is the case even if the dividend of £11m received by NSF in 2016 was not 'circular'.
NSF paid a dividend of £1.872m in October 2018, in reliance on the unaudited interim accounts prepared at 31 July 2018. Similar calculations suggest that profits available for distribution, based on those accounts, would have been as follows: retained profits of £2.491m plus a maximum of £0.584m in relation to share based payments, less purchases of treasury shares of £3.459m, being in aggregate negative £0.384m and so insufficient to pay the October 2018 dividend.
Please explain how the dividends paid by NSF in June 2018 and October 2018 were in compliance with the Companies Act 2006?
Financial information concerning NSF has been extracted from: (i) the audited consolidated financial statements of NSF for the years ended 31 December 2016, 2017 and 2018; (ii) the unaudited financial statements of NSF for the period ended 31 December 2015; (iii) the unaudited interim financial statements of NSF for the six months ended 30 June 2016; (iv) the unaudited interim financial statements of NSF for the two months ended 28 February 2018; and (v) the unaudited interim financial statements of NSF for the seven months ended 31 July 2018.
Financial information concerning NSF II has been extracted from the audited financial statements of NSF II for the period from incorporation to 31 December 2016.
Financial information concerning SD Taylor has been extracted from the audited financial statements of SD Taylor for the year ended 31 December 2016.
NSF's subscription of £11m for shares in NSF II for cash has been calculated as 1,000,000 shares issued in June 2016 for a nominal value of £1 and a share premium of £10 per the audited financial statements of NSF II for the period from incorporation to 31 December 2016.
NSF II's subscription of £11m for shares in SD Taylor for cash has been calculated as 1,000,000 shares issued in June 2016 for a nominal value of £1 and a share premium of £10, per the audited financial statements of SD Taylor for the year ended 31 December 2016.
Was the payment of the October 2018 dividend permissible under the Companies Act 2006 given the need to meet the 'net assets test'?
NSF's interim dividend of £1.872m in October 2018 has been calculated as the dividends stated to be paid as at 31 December 2018 (£7.177m) less the dividends paid at 31 July 2018 (£5.305m), as per the audited consolidated financial statements of NSF for 2018 and the unaudited interim financial statements of NSF for the seven months ended 31 July 2018.
NSF's aggregate of called up share capital and undistributable reserves of £271.175m has been calculated as the total of the share capital (£15.852m), share premium (£254.995m) and share based payment adjustment (£0.328m), per the unaudited interim financial statements of NSF for the seven months ended 31 July 2018.
The shortfall of £0.384m which would need to have been covered before any dividend could have been paid has been calculated as the aggregate of called up share capital and undistributable reserves of £271.175m less the net assets at 31 July 2018 (£270.791m), per the unaudited financial statements of NSF for the seven months ended 31 July 2018.
NSF's total distributions of £6.686m in reliance on the unaudited interim accounts of NSF for the two months ended 28 February 2018, has been calculated as the sum of dividends paid at 31 July 2018 (£5.305m) and the amount for the purchase of own shares at 31 July 2018 (£2.102m) less the amount for the purchase of own shares at 28 February 2018 (£0.721m), each per the unaudited financial statements of NSF for the seven months ended 31 July 2018 and the two months ended 28 February 2018.
NSF's share purchases of £1.381m at 28 February 2018, have been calculated as the amount for the purchase of own shares at 31 July 2018 (£2.102m) less the amount for the purchase of own shares at 28 February 2018 (£0.721m), per the unaudited financial statements of NSF for the seven months ended 31 July 2018 and the two months ended 28 February 2018.
NSF's cumulative reserves relating to share-based payments of £0.406m has been calculated as the sum of credit for equity-settled share-based payments for 2017 (£0.278m) and the credit for equity-settled share-based payments for the two months to 28 February 2018 (£0.128m), per the audited consolidated financial statements of NSF for 2017 and the unaudited interim financial statements of NSF for the two months ended 28 February 2018.
The figure of £0.245m (being the portion of cumulative reserves relating to share-based payments) which should be taken into account in calculating distributable profits has been calculated as the cumulative reserves relating to share-based payments of £0.406m less the share-based payment adjustment (i.e. cost of investment in subsidiaries) (£0.161m), per the audited consolidated financial statements of NSF for 2017 and the unaudited interim financial statements of NSF for the two months ended 28 February 2018.
NSF's profits of £6.440m which would be available for distribution on the bases described in section 3 of the Appendix, has been calculated as the cumulative retained profits (£8.273m) less the cumulative negative reserve (£2.078m) plus the £0.245m which should be taken into account when calculating distributable reserves, per the unaudited interim financial statements of NSF for the two months ended 28 February 2018.
The statement that the dividend in June 2018 appears to have exceeded the available distributable profits by £0.246m has been calculated as NSF's total distributions (£6.686m) less the profits available for distribution (£6.440m).
The statement that the dividend in June 2018 appears to have exceeded the available distributable profits even if the dividend of £11m received by NSF in 2016 was not "circular" is based on the calculation at paragraph 14.
The similar calculations suggesting that the profits available for distribution have been calculated as profits available for distribution comprising retained profits at 31 July 2018 (£2.491m) less purchases of treasury shares in 2017 (£1.357m) less purchases of treasury shares in the seven months to 31 July 2018 (£2.102m), plus share based payment charges for 2017 (£0.278m) plus share based payment charges for the period to 31 July 2018 (£0.634) less the amount debited to investment in subsidiaries at 31 July 2018 (£0.328m), a total of negative £0.384m, per the unaudited interim financial statements of NSF for the seven months ended 31 July 2018.
(the "FCA") and the PRA, is acting exclusively as corporate broker and financial adviser for Provident and no one else and will not be responsible to anyone other than Provident for providing the protections afforded to clients of Barclays nor for providing advice in relation to any matter referred to in this announcement.
FCA, is acting for Provident and no one else in connection with the matters set out in this announcement. In connection with such matters, Jefferies will not regard any other person as their client, and will not be responsible to anyone other than Provident for providing the protections afforded to clients of Jefferies or for providing advice in relation to the contents of this announcement or any other matter referred to herein. Neither Jefferies nor any of its subsidiaries, affiliates or branches owes or accepts any duty, liability or responsibility whatsoever (whether direct, indirect, consequential, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Jefferies in connection with this announcement, any statement contained herein or otherwise.