Pepper confirms $650m takeover offer from KKR

Non-bank lender Pepper Group has confirmed it has received a $650m takeover offer from private equity KKR.

In April, Pepper Group made co-chief executive Patrick Tuttle (left) redundant after 16 years of service to the company. Mike Culhane (right) took over with full responsibilities as chief executive.

Non-bank lender and distressed debt service company Pepper Group has confirmed it has received a $650 million takeover offer from private equity giant Kohlberg Kravis Roberts.

Pepper Group (PEP), which was listed on the ASX in 2015 at $2.60 a share, confirmed the indicative non-binding proposal with KKR Credit Advisors on Wednesday morning. KKR has put in a potential bid of $3.60 per share. Pepper has granted the private equity group exclusive access to its books for a due diligence process.

“There is no certainty than an agreement will be reached or that the proposal will be implemented,” John Williams, Pepper Group counsel said. Pepper has set up an independent board committee to consider the proposal and said the company has “no further comment at this time”.

Pepper’s largest shareholder is founder Seamus Dawes, who is also the group’s non-executive chairman. Mr Dawes owns a 30 per cent stake in the company. Wealth management group Perpetual owns a 12.4 per cent slice of the company.

Pepper last year booked a $61m profit, an increase of 26 per cent on the prior year.

Pepper has ridden on the coat-tails of a boom in non-bank lending for residential mortgages in Australia and Asia. Loan originations grew 51 per cent last year to almost $5 billion. In Australia alone, mortgage originations grew 36 per cent to $2.5bn by the year’s end. It also set a new record for loan writing in South Korea.

In Europe, where Pepper runs a large distressed debt administration service, the company grew its asset servicing business 10 per cent to $45bn.

In April, Pepper Group made co-chief executive Patrick Tuttle redundant after 16 years of service to the company. Mike Culhane took over with full responsibilities as chief executive. Mr Tuttle said he was “disappointed” with the decision.

That month, Pepper abandoned a planned 50-50 joint venture with Spain’s Banco Popular in the Spanish unsecured consumer finance market.

But Europe remains a key market for Pepper, particularly in Italy where the country’s banks are in dire straits. Italian banks have about €400bn ($550bn) worth of non-performing loans on their books — equivalent to about 20 per cent of the country’s GDP. Pepper Group, which manages distressed debt on behalf of investors, sees the financial instability as an opportunity.

As the banks try to sell portfolios of non-performing loans that they have written down by about 40-50 per cent, hedge funds are anecdotally buying the already written down loans at a further 50 per cent discount.

The Italian government recently brought in reforms to speed up the real estate auction process and has also introduced laws allowing bids up to 25 per cent below ¬reserve price to go ahead in an attempt to stabilise the balance sheets of the banks.