Pepper to consolidate rather than invest

Non-major lender Pepper, which is in the midst of a $675 million takeover, is planning to focus its future strategy on “scaling up existing platforms” rather than investing in new ones.

Speaking to Mortgage Business following the announcement that the group had agreed to a takeover bid from California-based investment manager KKR, Pepper group's chief executive officer, Mike Culhane, suggested that its recent acquisition of Banco Primus could be the last investment it makes for a while.

Mr Culhane said that Pepper’s expansion into Europe — including the latest acquisition of the Portuguese bank — had given the group “significant opportunities”, but added that while Europe had been “a happy hunting ground for Pepper over the last four or five years (with Ireland, the UK, Spain, Italy and now Portugal)”, he suggested that the lender's focus going forward would be on consolidating these platforms, along with the “more mature platform” in Australia.

He said: “If you look at all of our platforms in the world, the most mature platform is Australia. It’s the longest standing and it has the largest scale, both in mortgages and, more recently, in our auto business run by Bernie Campbell. 

“From that perspective, it remains an absolutely critical part to the group. But, for us, the opportunity is less in terms of buying new platforms but more in terms of scaling up our existing platforms.” 

According to Mr Culhane, KKR has “fully endorsed” this strategy. 

He said: “We have these great businesses around the world, and we've bought a number of them recently. So rather than going out and buying 10 more, let's spend some real time making the most of them.” 

While this applies to both the European and Australian operations, the group CEO added: “Australia is the biggest component of that pie, so undoubtedly Australia is going to be the biggest focus. 

“I think there are some really existing opportunities in terms of product development and so on and so forth that we can talk about once we get this deal closed.” 

KKR takeover offer 

The KKR entity, known as Red Hot Australia Bidco, has proposed to acquire all of Pepper’s shares. If granted, Pepper shareholders will receive a cash payment of 3.60 per Pepper share plus a 3 cent dividend.

With more than 181 million shares on issue, KKR will acquire Pepper for $675.9 million, $37 million more than the current market cap of $638 million. Pepper shares were valued at $3.43 before the market opened this morning. 

“After careful consideration, we believe this offer is consistent with the board’s efforts to deliver maximum value for shareholders,” Pepper group chairman Seumas Dawes said.

“We believe it represents a compelling opportunity for shareholders, allowing them to choose to either obtain liquidity for their shares at an attractive valuation or remain invested in the Pepper business.”

Mr Dawes controls 29.7 per cent of the group's total shares.

Shareholders may also choose a scrip option, enabling them to retain an interest in the Pepper business.

Pepper’s board has recommended shareholders vote in favour of the scheme, which — in addition to shareholder approval — is subject to a number of conditions, such as Foreign Investment Review Board (FIRB) approval and the approval of other local and foreign regulatory bodies, given Pepper’s business interests in Ireland, Korea and the UK.

It is expected that the approval process will be finalised by early November 2017.

[Related: Pepper takeover reflects 'latent' strength of non-banks]

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Annie Kane

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