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The recession and the rise in the gold price are proving to be two of the main drivers behind the resurgence of growth in the UK’s pawnbroking business. These factors are likely to herald a fresh wave of consolidation and expansion in the sector, according to investment analysts, bankers and industry players interviewed by mergermarket.
The pawnbroking industry provides credit to those who have limited access to traditional banking and finance services. Research and business information group Datamonitor reported that more than 9 million people are refused credit each year by the mainstream lenders, while a recent government survey by the Department for Works and Pensions said there are 1.6 million in the UK with no bank account and 4.2 million with only basic banking accounts, with no extended credit facilities.
In this environment, analysts said the opportunities for expansion and consolidation are set to increase and Albemarle & Bond Holdings and H&T Group – two of the UK’s biggest listed players - are both looking to grow store numbers through a combination of organic and acquisitions-led growth.
A&B and H&T have already outlined their expansion strategies and are expected to embark on a concerted store roll-out programme in the UK over the next few years. This could also include the acquisition of some of the UK’s smaller players, according to H&T chief executive John Nichols, who is also a past president of the National Pawnbrokers Association and an investment banker with knowledge of the sector.
These include independently-owned operators such as Fish Brothers, Berkeley Credit & Finance, TGS Pawnbrokers, Chain Reaction, Mallard Pawnbrokers and The Old English Pawnbroking Company. There are also a multitude of single-shop, family-owned businesses which could also come up for sale. “There will undoubtedly be some consolidation at the lower end of the market,” said Nichols. “In two-to-three year’s time you will probably see three of four big players emerge with between 200 and 250 stores apiece,” Nichols added.
Another investment banker agreed and said that while there was still a lot of growth to go for, consolidation among the small-to-medium sized players looked inevitable at some point. ”Once growth starts to slow, then you could see a situation where some of bigger players may get together,” he said.
The recession has created the climate in which these companies have been able to flourish and with greater demand for pawnbroking services and extended credit facilities many operators are now looking to expand their operations. “This is a golden opportunity,” A&B’s chief executive Greville Nicholls told this news service. “While the bulk of our expansion will come through new greenfield sites, we’re not ruling out acquisitions. We reckon there are about 200 small, family-owned pawnbroking firms in the UK. If any of them wanted to sell, then we would be interested,” he added.
Analysts say they believe the current economic conditions in the UK favours strong growth in store numbers for both A&B and H&T. “We calculate the specialist market is capable of doubling in size as traditional sources of consumer credit are withdrawn and the gold price remains high,” analysts at investment house Brewin & Dolphin said.
The surge in the gold price this year - the metal touched a new high of USD 1,060 an ounce this week - has been one of the main factors behind the improved profitability of the listed players. This has helped provide the financial strength and cash flows to enable them to take advantage of the next phase of expansion.
Earlier this year, H&T refinanced its debt facilities with a new revolving facility that allows it to draw down a maximum of GBP 50m, secured against a proportion of the pledge book and stock held. “H&T is well placed for expansion with new greenfield sites supplemented by modest acquisition opportunities, although any notable deals may require additional equity or debt financing,” analysts at KBC Peel Hunt remarked. H&T’s Nichols acknowledged that if a suitable acquisition came along the group may require extra funding. “There are a number of options we could take,” he said.
A&B, too, also has significant headroom on its existing GBP 13.5m facility. A&B’s largest purchase, to date, was the GBP 30m acquisition of specialist pawnbroker Herbert Brown in 2007. “If something sizable came along we could easily finance it,” said Nicholls. “Any acquisition would be in addition to our store roll-out plan. Our cash flow is strong and I would expect debt to remain stable even after the financing of the new stores programme,” he continued. A&B, which last year acquired two small pawnbroking businesses in Rhyl, North Wales, and Bermondsey, South London, plans to add between 10 and 15 stores this year. H&T plans to add between 15 and 20 new stores.
A&B, which currently has 115 outlets, recently reported a 30% surge in pawnbroking income to GBP 25.8m in the year to end-June 2009. H&T, which has 110 stores and reported a similar growth in pawnbroking profits to GBP 19.5m in the first half year, is also keen to expand. Asked why the two firms, which are very similar in size, had never contemplated a merger, H&T’s Nichols said each company had been pursing its own growth objectives. “I can see the logic for a merger. There would be synergies to extract and geographical overlaps would not be an issue. Obviously, we know them [A&B] well and talk to them from time-to-time about business. Who knows ... one day it might happen,” he said. A&B is capitalised at about GBP 130m, while H&T is valued at around GBP 97m.
At present, the biggest player in the UK is Money Shop with more than 250 outlets. It is owned by US-listed Dollar Financial Corporation, which has a market capitalisation of about USD 400m. Cash Converters is another well-known chain in the UK. It is a franchised operation owned by Cash Converters International, an Australian-based company. Cash Generators, a company with a similar operation to Cash Converters, is owned by Cash Generators Holdings, a UK company formed by New World Corporate Finance and the Cash Generators management.
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