Valuation Bombs

Putting a dollar value on the head of a broker is nigh on impossible, but the recent reporting season and proposed takeover of Challenger by National Australia Bank has disclosed some useful financials for calculations.

Using some very simple maths – such as the price of a network as a whole, divided by the number of brokers in a network – a simple measure of value can be derived.

Mortgage Choice brokers are currently worth around $230,000 each, based on a $140 million market capitalisation, but were worth closer to $140,000 earlier in the year when the share price tanked.

This is based on the assumption the groups retains the approximate 600 brokers it claimed to have at the end 2008.

Challenger’s detailed accounts for June 2008 and 2009 reveals it paid around $168 million for Choice in 2007, and about half that amount for PLAN ($89 million), the latter purchase occurring, admittedly, after the recent financial turmoil had rolled on a bit further.

The announcement of the sale to NAB shows Choice has 1,200 brokers and PLAN in the vicinity of 2,000.

Using the Mortgage Choice calculation it seems Choice brokers, on average, were worth $140,000 each, and PLAN brokers about $45,000 each some little while later.

Challenger paid $9.4 million for 19 per cent of FAST in late 2007, and in the highly unlikely event that NAB mops up the remaining four-fifths at a comparable valuation, it seems FAST’s 2,200 brokers are valued at around $22,500.

All up Challenger will have paid something like $300 million for its foray into broker distribution, and it sold these businesses, plus $4 billion of mortgages and the “white label mortgage product capability”, for $360 million last month.

Mortgage management was worth about $75 million annually after tax for the last two years, and even with the decline in non-Bank lending one assumes the business would have been worth a fair proportion of the $360 million total, so presumably PLAN, FAST and Choice are now worth somewhat less than $50,000 per broker.

And what of Aussie?

A recent Commonwealth Bank financial statement tells us that its one-third stake in Aussie cost $71 million, and it is tempting to keep life simple and multiply this cost by three to get a 100 per cent valuation, but we need to bear in mind that Aussie had by FY09 also bought 100 per cent of Wizard, which is presumably included in this number, in whole or in part.

Further, it’s not clear that the remaining two-thirds of the business would be worth the same as the first one-third, particularly to someone other than CBA.

Whatever the case, Aussie claims to have about 850 brokers, therefore CBA paid around $85,000 for a third of each broker, pricing these brokers well above the Choice, PLAN and FAST brokers.

However basic this analysis may be, the fact remains that the cheaper assets have changed hands for cash at least once in the last two years, and Mortgage Choice which currently values brokers at the top end of the price range, remains on the shelf.