Macquarie buys Esanda and upgrades again

Macquarie Group has agreed to buy the Esanda dealer finance portfolio from ANZ Banking Group for $8.2bn.

The portfolio has net lending assets of $7.8bn, comprising $6.2bn of retail loans and $1.6bn of finance provided to car dealers. It will be absorbed into Macquarie Leasing, almost doubling its vehicle finance portfolio to about $17bn. Total loans and finance assets for the Corporate and Asset Finance unit (which contributed 27% of net profit in 2015) will increase by 27% to about $37bn. The ACCC announced last month that it wouldn't block Macquarie from buying the business.

The skinny 5% premium to net lending assets doesn't offer much for the business's goodwill, but Macquarie is hopeful it can achieve scale benefits with its existing business over time. Management points out that this is a market it knows well and that it has successfully integrated similar acquisitions before, including the Ford and GMAC portfolios in 2009 and 2010. Management expects the acquisition to add 10 cents to earnings per share in its first full year, and to enhance the return on equity in Macquarie Leasing.

The deal will be financed through 'existing sources and third-party arrangements', plus a $400m institutional placement currently being conducted and a share purchase plan, the details of which will be provided following the first-half result on 30 October. The stock will emerge from its trading halt tomorrow morning (Friday) and the record date for the SPP was yesterday.

Management also upgraded its guidance for first half and full-year earnings. Although there was no change to the outlook provided for each of its business units, the earlier than expected closure of a transaction has brought forward some performance fees. Accordingly, the first half of 2016 (ending 30 September) should now see a net profit 55% higher than in the first half of 2015, compared to previous guidance for a 40% increase. That implies a first-half net profit of about $1,050m.

The second half will no longer get the benefit of those performance fees, and is 'now expected to be lower' than the first half. However, management still expects it to be higher than the $926m recorded in the second half of 2015. That would put the full-year result somewhere between about $1,980m and $2,100m: 4–10% higher than the $1,900m touted at last month's strategy update.

All in all, it's good to see Macquarie making meaningful acquisitions in areas it knows well, and increasing its proportion of annuity-style revenue. It also seems to have got into the habit of making earnings upgrades, which is a good habit to have.

Macquarie shares are barely changed since Macquarie upgrades again on 15 Sep 15 (Hold – $77.16), when we increased our Buy price from $50 to $60. A similar move to the Sell price is looking somewhat overdue, but we'll aim to hang on until the interim result before making further changes. HOLD.

The deal is relatively small beer for ANZ, but it will strengthen its common equity tier 1 (CET1) ratio by a useful 0.2 percentage points. HOLD.