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Private equity bid for Shawbrook still stands a chance, analysts say


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Private equity bid for Shawbrook still stands a chance, analysts say

An elevated final offer by private equity duo BC Partners and Pollen Street Capital Ltd. to take over Shawbrook Group Plc still has the potential to succeed, analysts say.

Directors of the U.K. challenger bank said June 6 that they continued to advise shareholders to reject the firms' offer, despite its having been raised by 10 pence per share to 340 pence per share. As they had before, directors said the offer undervalued the bank and its growth potential.

Pollen Street wholly owned Shawbrook before the lender's IPO in April 2015, and it leads a consortium that remains the group's largest shareholder, with a 38.8% stake.

The offer by Marlin Bidco (the vehicle created by Pollen Street and BC Partners for the bid) remains open for acceptance until 1 p.m. London time June 19. The firms have set a 50% acceptance threshold for the offer to proceed and said June 5 that 45.4% of Shawbrook shares in issue had been committed to accept the offer, including their own holdings.

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"The bid looks finely balanced to us. The shares are trading very slightly below the revised final offer price of 340 pence suggesting the market thinks there is a reasonable probability of Marlin being successful," Martin Williams, ?financials research analyst at investment bank KBW, told S&P Global Market Intelligence.

Shawbrook shares closed June 6 at 338.5 pence apiece, having closed at 266.6 pence March 2, the day before the bank first revealed the prospect of a takeover offer.

Ian Gordon, the London-based head of banks research at Investec, said it was "hard to call" if the private equity bid would be successful, although he agrees with Shawbrook management's view that it undervalues the company.

"You could argue that the investors could take the opportunity to switch to cheaper options in the peer group, and could take the opportunity to take profits now, even if not at an optimal, fully fair-value price," he said in an interview. "It is still conceivable that the deal gets done, even though I remain of the view that it's a low-pitched offer."

Although Shawbrook may fall short of some of the ambitious loan-book expansion targets it announced in May 2016, there is still significant growth potential that the improved private equity offer does not fully take into account, Gordon said.

"The scale of growth they are targeting is certainly ambitious, and I'm certainly not modeling for them getting their loan book to £8.5 billion by 2020, which is what they are envisaging. But they don't need to get to all of that in order for that stock to offer value," Gordon said.

Shawbrook's loan book stood at £4.1 billion at the end of 2016, a 22% year-over-year increase. The bank's portfolio comprises a mixture of residential and buy-to-let mortgages, small business loans and consumer finance. Shawbrook also bought a £53 million portfolio of first-charge mortgage loans from "complex" borrowers from an unnamed specialist mortgage lender in May and said it was in exclusive talks to buy a £300 million portfolio of buy-to-let loans from an undisclosed seller.

The perceived strength of the lending market may make it difficult to persuade investors to cash in on Shawbrook, said Anthony Da Costa, an analyst covering U.K. banks at stockbroker Peel Hunt.

"There isn't much in terms of bad news in the lending sector, other than perhaps that things are as good as they are going to get and there may be a turn in the market at some point," he said in an interview.

Part of Shawbrook's appeal is that its lending portfolio is fairly diversified by comparison to some of its peers in the U.K. challenger bank segment, so a slowdown in one part of the market such as residential mortgages would not be overly damaging for the bank, Da Costa said.

However, the team of analysts at RBC Capital Markets believe that Shawbrook's management has made a poor decision, and face the possibility of a damaging sell-down by its largest investor.

"In our opinion, this decision is ill-advised. Shareholders are now faced with an ongoing hostile bid from the largest shareholder, significant deal fees, discussions that have broken down between the largest shareholder and the company creating a sub-optimal board and managerial environment, and a large (nearly 40%) shareholder that could now possibly sell its shares if it is unable to gain control," they said in a June 6 note.