KKR walks away from Challenger

Kohlberg Kravis Roberts is understood to have been closing in on $3.4bn listed financial company Challenger for a potential takeover.

Kohlberg Kravis Roberts is understood to have been closing in on $3.4bn listed financial company Challenger for a potential takeover in recent weeks, according to sources.

However, the New York-based private equity fund is understood to have moved on about a fortnight ago, after assessing the merits of a potential transaction.

Sources say one of the deterrents for KKR centred on the payment profile for annuities, with concerns that there was a mismatch between the assets they held and the payments due.

However, experts have suggested this was definitely not the case, with Challenger having large amounts of capital and low-risk investments.

The value of Challenger has been languishing in recent months (it was worth about $2.4bn in September), although it has staged a rally since the end of last month, with its shares closing on Tuesday up 29.9c at $5.40.

The talk about buyer interest comes as private equity firms are said to be scanning the Australian listed market for value opportunities, with Tabcorp said to be a point of focus, along with AMP, Link Administration Holdings and other industrial companies such as Orora.

KKR purchased a 55 per cent stake in CBA’s wealth manager Colonial First State for $1.7bn in May this year and is known to have been a keen buyer for NAB’s wealth management business MLC, which was sold to IOOF.

It has also been assessing a potential acquisition of AMP in the past year, although it is not thought to be actively looking at the Australian financial business at this time.

In recent months, The Carlyle Group was known to be assessing a potential acquisition of Challenger, as was apparently another suitor.

DataRoom now understands that the other interested buyer was a Japanese group, prompting those familiar with the company to point to its 15 per cent shareholder, MS&AD.

Investment bank Citi is understood to be working with the Japanese financial, which did not participate in Challenger’s last equity raising.

Challenger’s major shareholder, MS&AD, has always been discussed as a possible suitor, and some experts say it would be the group most likely to work in conjunction with a private equity firm.

It remains unclear whether the Japanese party is still planning to make a play for the company.

Carlyle is also understood to have run the ruler over Challenger about three years ago, as well as recently, while earlier NAB and Macquarie were believed to be suitors.

More than 10 years ago, Japan’s Nomura had an interest.

Before the onset of the COVID-19 pandemic this year, Challenger’s share price was above $10.

The other major investor, with a 14.64 per cent stake, is Caledonia Investments.

A deal would be complex for a party because they would need to buy shares in the business as well as provide the funding for capital notes, taking the amount of funds needed to control the business to about $5.5bn.

Because Challenger has to mark to market its securities, the company has had to make writedowns worth about $750m due to the dislocation of global debt markets amid the pandemic.

But the decline in value is only in theory, because if the securities are held for the full term, the original value remains.

It means that an acquirer could offer a $750m premium for the business and would still effectively be securing the company at a bargain price.

Challenger has a booming funds management operation that includes its highly successful Fidante business, and the $81.4bn it has under management is being grossly undervalued by its share price. But the earnings from its life insurance operations have fallen because of the decline in the number of financial planners selling its products.