On Monday (12 August), it was announced that the ASX-listed Australian Finance Group (AFG) would merge with Connective Group by purchasing the aggregation company for a price of $120 million, with $60 million payable in cash (funded through a new corporate debt facility) and 30.9 million AFG shares.
The merged entity, which is subject to court and shareholder approval, would result in a national mortgage distribution network of more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19.
However, the two brands would retain their brands and executive management structures (but Connective CEO Glen Lees will be offered the opportunity to join the AFG board).
Speaking to Mortgage Business about the merger, Connective director Mark Haron explained that the deal came about following an independent commercial process started by corporate advisory firm 333 Capital in late 2018.
Mr Haron said that the two aggregation companies had recently become “more aligned”, particularly given the industry consultation and unity brought about from the ASIC Remuneration Review in 2017, the banking royal commission in 2018 and the federal election earlier this year.
“[We’ve] found ourselves working increasingly side by side on behalf of brokers and the industry and through that, senior management at AFG and our senior management then started to have some discussions about where things were going... and this ended up being the end outcome,” he said.
The Connective director told Mortgage Business that AFG’s securitisation program would give Connective “the ability to control and manage [its] destiny and help brokers manage theirs”.
He added that the merged entity would also enable the two aggregators to “work as a combined force” in the compliance scrutiny and technology-driven era” and manage these “more effectively and efficiently”.
However, he emphasised that the day-to-day running of the businesses would remain much as it is now, with AFG retaining its FLEX CRM system and Connective retaining Mercury, along with the “same executive management team and [with] the banks that Connective have spoken to today all continuing to run separate BDM teams and look after each aggregator separately as they currently do”.
“We will still be running our separate businesses while also being a market-competing against each other,” Mr Haron said.
“This is not new; you have FAST, PLAN and Choice having done this for years and its similar in other groups where they run different models.
“I think brokers will see what a great thing if it is for them when the strength of both their businesses together play out to help the industry overall without diluting the competition.”
Should the Australian Competition and Consumer Commission, the courts, shareholders and other relevant parties approve the deal, it is expected that the merged entity will form “in the early new year”.
Speaking of the new deal, AFG chairman Tony Gill commented: “The delivery of competition and choice to the Australian lending market is at the core of our strategy. The expanded distribution channel and broader diversification of products the combined group can supply will provide greater choice for both brokers and consumers”.
AFG CEO David Bailey added: “AFG’s ongoing successful execution of our earnings diversification strategy in recent years has the business set up for strong cash flow generation and well positioned for growth. The prospect of complementing AFG’s existing business with the cultural fit and similar customer-focused philosophy of the Connective business is compelling.
“Competition is at the heart of both businesses, with the non-major lenders representing 48 per cent of residential mortgage lodgements through AFG’s network in July 2019. Greater geographical portfolio diversification positions the merged group to further enhance choice and competition for consumers in all markets across Australia. Together with AFG’s existing growth plans, the opportunity presented by the sale process undertaken by Connective was absolutely aligned to our strategy.”
Mr Bailey said the transaction represents an opportunity for all AFG shareholders to benefit from the diversification and flexibility of the combined group.
“Connective brokers will have access to AFG’s securitisation program, and the combined network also offers the opportunity to grow scale in both asset finance and commercial lending. Connective brings a contrasting revenue model based on fixed membership fees and offers services across residential, commercial and asset finance, as well as its own range of white label home loan products under the Connective Home Loans brand.
“This should result in more lender and product opportunities for brokers, which in turn means more choice for their customers. This is particularly important for the self-employed and SME sectors of the market that are presently under-banked,” he said.
“When we also consider the possibilities for both cost and revenue synergies, together with the leverage of the distribution potential, the transaction becomes one we are delighted with. We will continue to update the market as we reach key milestones in the process.”
Mr Bailey added that he “looked forward” to working with the “respected senior executives” Glenn Lees and Mark Haron along with the broader Connective team and their network of brokers to create a driving force in competition in the Australian lending market”.
Connective CEO Glenn Lees also commented on the deal, saying: “The coming together of the Connective and AFG teams is a natural fit. We share a strong set of values with the priority to always work on behalf of our brokers.
“I am incredibly proud of the business and, alongside the team, I look forward to continuing to drive the success of our brokers who positively impact the lives of thousands of Australian home buyers every year.”
[Related: AFG prices $500m RMBS]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.