Pepper Money homing in on Humm division ahead of float

Sources say that Pepper may be looking to buy businesses to beef up the size of the company ahead of its float.

The Kohlberg Kravis Roberts-owned Pepper Money is understood to have more than one acquisition target on its agenda as it ramps up plans for its initial public offering, with sources suggesting it has been circling Humm Group’s commercial and leasing division.

The business has been slated for a sale by Humm — previously called FlexiGroup — for well over a year, with the company announcing in August that it was subject to a strategic review.

Previously, the asking price for the Humm division was said to be about $300m.

Sources say that Pepper may be looking to buy businesses to beef up the size of the company ahead of its float, with Westpac’s auto loans division also on its agenda.

Pepper is through to the second round of that contest, which sees it compete with private equity firms Cerberus and TPG Capital, which has partnered with Liberty Financial, and Allied Credit to buy $2bn worth of auto loans from Westpac and the opportunity to secure a business that writes about $5bn of new loans annually.

However, the company’s owner, KKR, is believed to be a tough negotiator when it comes to price, which has market analysts questioning whether it will be the winning party in both auctions.

It comes at a time when the market is awash with opportunities in the non-bank lender sector as low interest rates fuel a residential housing market price rally as the country works its way out of the global pandemic.

Australia and New Zealand’s largest non-bank payments and consumer finance business, Latitude Financial, staged a successful debut on the Australian Securities Exchange on Tuesday and Pepper is next, while now there are suggestions that Blackstone is considering a listing for its non-bank lender La Trobe Financial through Goldman Sachs.

Some sources have suggested that Blackstone or its advisers recently tested market interest for the $2bn-odd business among lenders such as Bank of Queensland, Suncorp and Bendigo and Adelaide Bank, but they passed on the opportunity.

Before Blackstone purchased the financial group, My State Bank moved to buy La Trobe but was said to have been blocked by the Australian Prudential Regulation Authority because the deal would have created sudden and dramatic growth for the small bank.

Pepper’s IPO plans are now in full swing, with the group releasing analyst research on the company on Wednesday and its management holding meetings over the next week.

Analysts told prospective investors on Wednesday that Pepper has 0.5 per cent market share of mortgages in Australia and, of its $15bn of assets under management, $10.7bn were outstanding mortgage loans to customers originated or acquired by Pepper Money, $2.6bn were asset finance loans and $1.7bn were in loans and other servicing that Pepper Money services for third-party clients.

Listed comparable Resimac trades at about nine times its net profit, and market sources have suggested prospective investors would be keen to buy the business for no more than 10 times.

Many investors remember Pepper when it was listed before it was bought by KKR for $675.9m in 2017.

But KKR is retaining the international arm of Pepper and only floating the Australian and New Zealand operations.

The company’s avenues for growth are in New Zealand, where it is a relatively new entrant to the residential mortgage market and has a small presence, and through its white label mortgage products, which currently accounts for about 40 per cent of its overall loan originations.

It generated $106.3m of net profit last year and is set to generate $120.7m of profit this year. The return on equity is expected to be 20.6 per cent this year.

The analysts believe the value of Pepper would be akin to smaller non-bank peers at the lower end and at the upper end.

Working on the Pepper float are Credit Suisse, Goldman Sachs and RBC Capital Markets along with Reunion Capital.