The Pepper Money Ltd (ASX: PPM) share price is up 24% after confirming it has received a takeover bid from Challenger Ltd (ASX: CGF).
Pepper Money is one of the largest non-bank lenders in Australia, while Challenger is the leading annuity business in Australia.
Takeover bid
Pepper Money said in an ASX announcement that it has received a confidential, non-binding and conditional proposal to buy 100% of Pepper Money.
The offer is to acquire the business at a Pepper Money share price of $2.60, “less the final dividend in respect of 2025 and any special dividend paid or declared.” Considering it’s trading at $2.19 right now after jumping 24%, it’s easy to see why the market is excited by this.
Under the arrangement, Challenger and a bidder called Pepper Group ANZ HoldCo Limited will jointly acquire Pepper Money.
With this offer, Pepper Group will initially buy an interest in the acquiring entity that is at least equal to its current interest in Pepper Money.
Pepper Money’s board has established an independent board committee (IBC) to assess this offer. It has granted Challenger exclusivity to undertake confirmatory due diligence and progress relevant transaction documentation in order to present a more certain proposal.
Discussions between the parties are ongoing, though there is no certainty that a more certain proposal will occur or that this proposal will lead to a definitive agreement.
Why does Challenger want to invest in Pepper Money?
Challenger explained that an investment in Pepper Money will “provide Challenger with strategic, long-term rights to access fixed income assets to support growth and returns.”
The annuity business also said that the transaction is structured that, if completed, Challenger would hold no more than 25% of total Pepper Money’s shares.
Challenger also said that it’s committed to being a disciplined allocator of capital, that it has significant capital flexibility, and has no intention to do a capital raising to fund the transaction. Any transaction would be “strategic and accretive” for Challenger’s earnings per share (EPS).
What to make of this for the Challenger share price
It’s an interesting move by Challenger (and co-bidder).
The market clearly doesn’t like the news for Challenger, with the Challenger share price down 5% at the time of writing. Challenger’s past banking attempts have not become a sizeable part of the business.
Challenger has to pay to a lot to potentially get the deal done and it suggests a lessening of a focus on annuities, so I can see why the market isn’t enthused.
Time will tell if the takeover goes ahead, but Challenger shareholders could be a headwind for the deal.
Either way, there are other ASX dividend shares I’d rather buy.
