Challenger Ltd (ASX: CGF) has announced an acquisition this morning, can it help the recovery continue?
Challenger is the largest annuity business in Australia. That means it takes client (retiree) money and delivers them a guaranteed return over a set period of time, or for life, depending on the annuity.
What’s the acquisition?
Challenger has entered into an agreement to buy MyLifeMyFinance, an Australian-based customer savings and loans bank, for an acquisition price of $35 million from Catholic Super.
The company said that the acquisition is highly strategic and provides Challenger with the opportunity to significantly expand its secure retirement income offering.
After the acquisition is complete, Challenger will hold an APRA authorised deposit-taking institution (ADI) licence, providing access to Australia’s $1 trillion term deposit market.
What does Challenger plan to do?
It will initially focus on expanding MLMF’s term deposit offering by replicating the investment strategy used to support Challenger’s term annuity business. Under Challenger ownership, it will be able to provide term deposit customers compelling value across a range of tenors.
Challenger will get access to a wider range of customers through multiple distribution channels, including direct and through intermediated channels.
Term deposit business conducted through an ADI is economically similar to Challenger’s term annuity business. It will be accounted for and operated under accounting and capital standards applicable to ADI institutions.
The acquisition price and capital requirements, including regulatory capital to support growth, will be funded by a $100 million distribution from Challenger Life during the March 2021 quarter.
The deal is expected to reduce Challenger’s FY21 normalised net profit before tax by around $3 million and the is expected to break even during FY22.
Challenger continues to expect normalised net profit before tax for FY21 to be within its guidance range of $390 million to $440 million. One-off transaction and integration costs of between $5 million and $8 million will be incurred in FY21 and will be shown as a significant item.
Challenger Managing Director and CEO Richard Howes said: “Term deposits represent a significant asset class for Australian retirees and entering the market provides an opportunity to play a greater role supporting the retirement incomes of our customers, while also attracting a new cohort of customers.”
Summary thoughts
This seems like a smart buy by Challenger, I can see how term deposits would fit well with the current business. However, Challenger will have a lot of competition from the big four ASX banks, so I’m not sure how material it will become to the overall group.
In terms of financial businesses, I think I’d prefer other ideas such as Magellan Financial Group Ltd (ASX: MFG) or even Macquarie Group Ltd (ASX: MQG).
