KKR in $1.7bn CBA wealth swoop

Commonwealth Bank has kept a seat at the deal-making table in the $3 trillion superannuation industry

CBA is selling a majority stake in wealth business Colonial First State to private equity behemoth KKR. Picture: AAP

Commonwealth Bank has kept a seat at the deal-making table in the $3 trillion superannuation industry, even after offloading a majority stake in wealth business Colonial First State to private equity behemoth KKR & Co.

The bank has undertaken a phased retreat from the wealth sector over the past three years.

Among other divestments, it is unwinding the mega $9.4bn takeover of Colonial, which in 2000 sparked a transaction frenzy as National Australia Bank pounced on MLC and Westpac bought BT Financial Group.

While the major banks are now exiting wealth businesses — which caused the biggest headaches during the Hayne royal commission — CBA chief executive Matt Comyn sees some merit in retaining an exposure to superannuation.

“It’s still an industry that will continue to grow, and like any industry it will change over that period of time. So we feel this is an optimal outcome overall for us and we are certainly committed to partnering with KKR to deliver better outcomes,” he told The Australian.

Mr Comyn also sees scope for Colonial First State (CFS), led by KKR, to participate in rationalisation of the superannuation and investment platform sector.

“There are a number of different ways that the superannuation sector may unfold, including potential consolidation opportunities over time,” he said.

“We see it still as a business, one of few, that have a structurally mandated 9.5 per cent growth rate so it’s attractive from that perspective. We feel we’ll be able to create value with the right partner over multiple years.”

Mr Comyn sealed the deal to sell 55 per cent of CFS to KKR in a $1.7bn transaction after lengthy engagement including with George Roberts, one of investment firm’s founders and co-chairman and joint-CEO.

CBA expects proceeds from the sale, after tax and deal costs, will amount to $1.5bn. The transaction is expected to close in the first half of calendar 2021 and requires the green light from the banking regulator and Foreign Investment Review Board.

The sale of the majority of CFS values the entire division at $3.3bn. It follows the divestment of a string of other CBA businesses including its global asset management unit, financial planning operations and life insurance arm.

The bank had previously considered spinning off CFS and its mortgage broking businesses into an ASX listed company, before shelving those plans.

Devil in the detail

As at April 30, Colonial First State had about $135bn of funds under administration.

Regal Funds Management portfolio manager Mark Nathan said while he saw the potential for both parties to benefit from the CFS sale, the “devil will be in the detail”.

“CBA highlighted the need to invest significantly in this business and until we better understand what that entails it’s difficult to be categorical,” he added.

“It does allow CBA to shore up their already strong capital position, but at the expense of future earnings. As a stand-alone business, CFS will get greater management focus which generally results in better operational performance.”

Mr Comyn wouldn’t comment on the amount of expected investment that KKR and the bank were expecting to make in CFS, saying only that they wanted to ramp up spending on areas including technology, services and education. The deal also includes an indemnity which means CBA takes responsibility for current regulatory issues, customer remediation, and any legal action relating to CFS.

KKR — which has assets under management of $US207bn ($320bn) — is using its Asian private equity fund to help finance the CFS purchase.

The private equity giant’s track record in the Australian financial services sector has been patchy. It has exposure via holdings in finance and accounting group Findex and consumer finance company Latitude, which it owns jointly with Deutsche Bank and Varde Partners. Latitude aborted its second attempt at an ASX listing last year.

Head of KKR Australia Scott Bookmyer said: “Partnering alongside CBA, we look forward to accelerating CFS’s transformation and further strengthening its market position to deliver long-term benefits to its member base.”

CBA said the CFS sale price was secured at 15.5 times the division’s pro-forma net profit after tax of about $200m.

But JPMorgan analysts highlighted that the sale multiple was based on a CFS profit number that was adjusted for a host of factors, requiring caution. “Stated transaction multiple for CFS is 15.5 times pro-forma net profit after tax (NPAT) of $200m; however, this is based on NPAT adjusted for the impact of expected margin changes, product closures and estimated operating cost uplifts on a stand-alone basis,” they said.

Westpac CEO Peter King this month shunted businesses including wealth platforms, superannuation, retirement products, investments, insurance, auto finance and its Pacific unit into a newly created division as it considers potential divestments.

NAB is pursuing a separation or sale of wealth arm MLC, despite numerous delays, and ANZ has sold its investments and financial planning units to IOOF.