Macquarie favourite to win ANZ's Esanda auction
Macquarie Group is considered to be the favourite to win the auction of ANZ's Esanda dealer finance unit as it thinks the business would fit well into its corporate and asset finance unit.  However, there are questions over how Macquarie intends to finance the purchase, especially after its capital raising exercise in March to fund the acquisition of 90 aircraft from Terra Firma, along with the regulatory threat of capital raising targets. Some analysts believe that Macquarie may be planning to free up capital by disposing of balance sheet assets so as to enable the acquisition to take place. The Esanda portfolio is expected to gain a sale price of as much as AUD 1.5bn ($1.1bn).
One outstanding question for Macquarie, though, is how it may finance the purchase, particularly after it kicked off a capital raising in March to help fund the acquisition of 90 aircraft from Britain's Terra Firma and the Canada Pension Plan Investment Board.

This is also complicated by the enduring fact that financial institutions continue to operate under the threat of more stringent capital requirements. Macquarie's status of a recycler of assets held on its balance sheet may, however, work in its favour as the pointy end of the Esanda auction draws closer.

Macquarie's corporate and asset finance division, which includes aircraft, rail and car leasing, had $28.7 billion of loans and leases as at March 31. The motor vehicle leasing portfolio expanded by 11 per cent to $9 billion in the 12 months ended March 31, and had total contracts of more than 300,000. At the time Macquarie pointed out that its motor vehicle and equipment finance channels "continued to expand", including additions to the Australian dealer network and ongoing expansion in the United Kingdom.

Already in the tussle for Esanda's portfolio, there are factors working in Macquarie's favour. It is being run at a similar time to the sale of GE Capital's Australian commercial loan book, meaning most interested parties have already decided at which process to run harder.

TPG and Blackstone are believed to have already withdrawn from the Esanda auction, and Apollo Global Management and Bain Capital are not vying for the assets. That pits Macquarie against the likes of The Carlyle Group, and KKR & Co working alongside Varde Partners.

First-round offers

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Deutsche last week sent out process letters to the remaining bidders, after first-round offers were received on June 29. More information will be distributed with the next indications of interest to be submitted by the end of the month, after which time another shortlist will be drawn up.

Macquarie's corporate and asset finance is jointly led by Garry Farrell and Ben Brazil, both of whom are considered astute dealmakers.

As at March 31, Macquarie had surplus capital over January 2016 minimum capital requirements of $2.7 billion. Analysts and fund managers are mindful, however, that Macquarie is unlikely to markedly whittle down this figure. The March institutional placement and subsequent share placement plan raised a total of $670 million, which Macquarie said would be used to fund the aircraft purchase, further strengthen its capital position and accommodate future growth.

Moody's Investors Service last month, however, raised concerns about the firm's balance sheet becoming stretched if it continues to increase its leasing and mortgage assets.

Strong contender

Cadence Capital's managing director Karl Siegling believes Macquarie is a strong contender for the Esanda dealer finance unit, but thinks Macquarie may plan to free up capital by disposing of balance sheet assets to easily enable the acquisition.

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​"It's a good fit for them at the right price," he said. "Macquarie's management do have capital release from their balance sheet up their sleeve… I think they are unlikely to raise money in their third quarter."

Cadence, which owns Macquarie stock, first bought shares in the company when it was trading at $28.

All indications are that Macquarie is pushing ahead with selling out of its pre-global financial crisis investments, particularly those that can garner an attractive price. Recent speculation in the UK has Macquarie seeking to sell its stake in Moto Hospitality, a highway service station owner. Macquarie's infrastructure unit bought Moto as part of a consortium of investors in 2006.

According to Bloomberg, bids are due at the end of July and a transaction may value the company at £1 billion ($2.1 billion).

Macquarie announced a string of divestments prior to its March 31 balance date. It closed the sale of a United States-based logistics facility to funds managed by CRIC, covering a 4700-car rail logistics facility. That followed the announced divestment of Macquarie's equipment finance business in the US, with the sale price for that company thought to be in the order of $US380 million ($510 million).

Analysts at JPMorgan, while raising Macquarie to a "buy" rating from "neutral" last week, are cautious on asset sales by Macquarie. They estimate that the non-recurrence of divestments seen in 2015 may detract from earnings growth in 2016. The firm changed its recommendation largely because of anticipated benefits flowing to its securities unit from heightened market volatility in Hong Kong and China. JPMorgan also highlighted the ongoing upside that Macquarie receives from a lower tax rate and depreciating Australian dollar, as the firm earns the bulk of its income from outside Australia.

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Buying the Esanda dealer finance arm will of course have to fit with Macquarie's broader earnings growth objectives and its view on whether the acquisition will be accretive, like that of its 2015 aircraft purchase.

Next insight

The next insight into Macquarie's appetite for acquisitions and its earnings trajectory will likely be provided at the company's annual general meeting on July 23. Investors tend to sell down the stock if an upgrade to earnings guidance isn't forthcoming at the AGM.

Macquarie's chief executive Nicholas Moore likes to play a straight bat on the company's outlook, and always reminds investors of the external caveats that can hinder earnings.

Macquarie has said its 2016 full-year result would be "slightly up" on this year's $1.6 billion profit. But analysts are expecting $1.8 billion, in line with a record 2008 result. The company has in recent years typically upgraded guidance through the 12-month period.

Mr Moore also tends to be coy on potential acquisitions, so it is important to keep in mind that Macquarie has missed out on a raft of large transactions in the past two years, including the bulk of Lloyds Banking Group's Australian assets.

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Solid momentum

The company does appear to have solid momentum across several parts of its business. Macquarie finished the first-half of the calendar year ranked in top spot for core investment banking revenue, on Dealogic's estimates. It had income of US$111 million for the six-month period.

Another way to gauge optimism in Macquarie's outlook is by looking at non-executive director notices. Directors Diane Grady, Gordon Cairns, and Nicola Wakefield Evans, have all acquired Macquarie stock since the May earnings announcement as has chairman Kevin McCann.

As Macquarie forges toward the end of its first-half on September 30, investors will be intently watching the business end of the Esanda dealer finance sale, and of course any other strategic moves by Macquarie.