Challenger (CGF) has quickly redeployed funds from the recent sale of its stake in Kapstream to acquire a European alternative investments business, Dexion Capital, for $41m up front plus a six-year earn-out dependent on profitability.
Citi considers the acquisition a reasonable use of the majority of the $45m proceeds from Kapstream. The asset management component of the acquisition will ultimately be re-branded as Fidante Europe and the Dexion brand retained for the remainder. The acquisition is viewed as consistent with the desire to grow the Fidante Partners distribution network outside Australia and offers potential for synergies from cross-selling global investment products. Macquarie does not consider the transaction material to Challenger but does expect it will provide the means to expand the Fidante model in the UK.
Dexion, based in the UK, provides a large established distribution channel to UK and European investors. Dexion describes itself as the alternatives investment bank and has raised over US$18bn for UK-listed funds since establishment in 2000. It maintains three relationships with boutique fund managers across renewable energy, UK social housing and UK and US agriculture assets. It also manages a London-listed alternative fund totaling $6000m in assets under management.
The deal should increase the asset class and geographic diversification of Challenger’s lower capital intensity funds management and aid the sustainability of the company’s 45-50% dividend pay-out ratio, Deutsche Bank observes. On that basis the broker regards the acquisition in a positive light, as while small, it is both financially and strategically sensible. The deal is expected to meet Challenger’s 18% pre-tax return on equity target which, in turn, implies pre-tax earnings of at least $7.5m. Deutsche Bank retains a Hold rating on the stock, given the low interest rate environment continues to pose a challenging backdrop for annuity sales.
With the two UK-based alternative asset managers the company already owns, Whitehelm Capital and WyeTree Asset Management, JP Morgan notes Challenger will have around $5.5bn in funds under management in Europe which provides reasonable scale. The broker still expects margin pressure and rising capital requirements will be a drag on returns but acknowledges growth opportunities do exist via new platforms and the possible recommendations stemming from the Murray review into the financial industry.
UBS concurs that while modestly accretive, the acquisition will not move the dial at a group level. The broker notes Dexion Capital’s UK-listed fund business is based on transactions, matching alternative strategies with investor capital, and distribution fees are typically spread over a number of years with administration fees paid on an ongoing basis. Thus, predictability of FY16 earnings is reasonably high. The broker estimates Dexion will add around 15% to Challenger’s funds management earnings and be 1.5% accretive on a full-year basis.
Challenger shows five Buy ratings and three Hold on FNArena’s database. The consensus target is $7.47, suggesting 6.8% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 4.2% and 4.6% respectively.