How Fisher and Paykel Appliances' failure to sell its finance company became a blessing in disguise

By Gareth Vaughan

Fisher & Paykel Appliances' failure to sell its finance company subsidiary three years ago, viewed as a significant set back at the time, now looks a blessing in disguise.

Back in November 2007, just as the global financial crisis was ratcheting up a gear and other local finance companies were falling like dominos, the company primarily known for the fridges, dishwashers and ovens it makes, decided to put its consumer lending subsidiary, Fisher & Paykel Finance, on the block.  Five months later, in March 2008, the 'for sale' sign was pulled down and put away with F&P Appliances saying bids for its finance unit hadn't exceeded its internal valuation.

Now, with F&P Finance having just delivered a 20% rise in annual earnings before interest and tax (ebit) to NZ$34.7 million, compared with the group's appliances business seeing its annual ebit drop 20% to NZ$23.7 million, F&P Appliances managing director Stuart Broadhurst acknowledges the failure to sell was indeed a blessing in disguise.

"Absolutely, it’s stating the obvious," Broadhurst told interest.co.nz.. "What we’ve been through in the last couple of years, it (F&P Finance) has been very supportive of the group. It has helped the group through very difficult times and I’m just thankful that we didn’t do that (sell)."

The tough times F&P Appliances has been through include breaching its banking covenants in May 2009 when its debt reached NZ$502 million, sales plummeting as the credit crunch spread, shifting much of its whiteware manufacturing (and jobs) to cheaper places like Thailand and Mexico from New Zealand, Australia and the United States and suffering asset write-downs and big losses. It ultimately bailed itself out through a NZ$143 million issue of new shares including selling a 20% stake to Chinese whiteware maker Haier.

And although selling whiteware products remains tough in most of the countries the company operates in, F&P Appliances is now seemingly back on a solid footing with its debt down to NZ$100 million and annual net profit after tax of NZ$33.5 million versus a loss of NZ$83.3 million in the previous year. In the wake of this Broadhurst said he's keen to resume paying dividends as soon as possible to placate "long suffering" shareholders.

A 'very good' price would be needed to sell now

Asked whether F&P Finance (which delivered an 18.4% return on equity in the year to March (which is in excess of the 13.3% 2010 figure achieved across the banking sector) was still for sale, Broadhurst suggested any acceptable offer would have to be a knock out one.

"With it performing as well as it has, with that sort of return on equity, you would want a very good price to consider selling a business like that," said Broadhurst.

 "Well it has been a good result last year, there’s a lot more upside yet in that finance business." 

 Alastair Macfarlane, F&P Finance's managing director, said the profile of the business has been "very low" meaning some of this upside could come from raising it. The finance company has stepped up spending on marketing, promotion, development and products, although Macfarlane won't provide financial details of the extent of this spending increase.

"You’ll see the investment we’ve made recently in rebranding above the line our Q Card product (marketed as a credit card alternative)," said Macfarlane. "That’s an example of things we’ve never done before. What we’re doing is dealing more on a one-to-one basis with customers and influencing where they shop, the credit limits they’ve got, how they use their Q Card, how they see the benefits of the product that you can’t get on an average Visa, Mastercard type platform."

'Creative finance plan promotions'

Macfarlane said against a backdrop of weak retail spending, many retailers are using creative finance plan promotions as they strive to entice customers to shop in their stores.

"Footwear companies, clothing companies, even travel companies, are starting to see the merits of alternative ways to promote products," said Macfarlane.

And this didn't just amount to cash discounts.

"In fact the cash discounting merchants are going to go broke because they’re eroding their margins so much. Our product fills a very interesting niche category," Macfarlane said. "We’re starting to have dialogue with merchants who we’ve never spoken with before in market segments we’ve never spoken with before."

 This new approach from F&P Finance has some similarities with what fellow consumer lender GE Money is doing. It plans to launch a credit card this year and recently began a partnership with jeweler Michael Hill International offering interest free terms for big ticket jewellery items. GE also wants to "manufacture" financial services for the grocery market and add to what it terms as its four key strategic partners – Harvey Norman, Noel Leeming, Trade Me and Kiwibank.

Bank loan cover ahead of expiry of Crown guarantee

In the just announced results for the year to March, F&P Finance had a net margin of 10.8%, up slightly from 10.6%, its cost to income ratio fell to 36.1% from 37.4% and gross receivables at March 31 of NZ$628 million down from NZ$641 million. Net interest income rose 7% to NZ$74.5 million and total operating income lifted 9% to NZ$98 million, operating expenses rose 5% to NZ$35.4 million and earnings before interest, tax, depreciation and amortisation climbed 16% to NZ$43.1 million.

The firm, with a BB sub-investment, or "junk", grade credit rating from Standard & Poor's, is one of only four companies covered by the extended Crown retail deposit guarantee scheme which runs until December 31 this year.

Its retail debenture reinvestment rate fell to 60% in the six months to March from 67% at September 30 last year. Debentures make up just 24%, or NZ$140 million, of F&P Finance's funding. As of March 31, it had NZ$77 million of a NZ$285 million securitisation programme unutilised and NZ$160 million of NZ$385 million worth of bank loans untapped. 

The bank loans, with ANZ, BNZ and Westpac, have had NZ$50 million added in recent months and Macfarlane said with NZ$45 million of liquid assets added on, this combined with the bank debt, covers retail debentures to the tune of 146%. Parent F&P Appliances has NZ$205 million of shareholders funds in the business.

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