Challenger shares spike as stake sale fuels takeover talk

US private equity heavyweight Apollo Global Management has muscled into listed annuities specialist Challenger’s register, teaming up with Bermuda-based investment firm Athene to pick up a 15 per cent stake in the company.

Athene and Apollo Global Management have snapped up the minority stake for $729 million, claiming there were “long-term opportunities in partnering with and supporting Challenger’s continued growth”.

Challenger shares jumped more than 10 per cent on the news, prompting speculation the company could be ripe for a takeover.

Challenger chief executive Richard Howes.Credit:James Brickwood

Challenger chief executive Richard Howes told investors last month the company had been hit with a “confluence of disruptive external events” and forecast profits would fall to the lower end of its guidance range this financial year.

The company’s share price fell by more than 50 per cent during March last year, amid the wider market sell-off as COVID-19 reached Australia. But due to capital requirements attached to Challenger’s life business, it was forced to sell equities during this time which locked in losses.

Argo Investments senior investment officer Andy Forster, who is also one of Challenger’s largest shareholders, said the company had been a “laggard” from a performance perspective and that could pave the way for potential takeover bids.

“It’s been a challenging one, pardon the pun, for investors to understand the business model,” Mr Forster said. “It has been a disappointing past 12 months, how they’ve conducted themselves.”

While Mr Forster said he had not heard of any official offers, he said the settings were right for mergers and acquisitions. “There’s been speculation over the last six to 12 months about a takeover. It’s not surprising given debt is so cheap, there’s been so much corporate activity.

“It’s a little hard to know but it’s positive to see someone taking more interest in Challenger.”

However, Allan Gray managing director Simon Mawhinney, who is also a major Challenger shareholder, dismissed the potential for a takeover. “It’s not that surprising that trade parties are interested in any business when prices and profits are depressed, I think it’s part of a normal cycle. I don’t think there’s too much to read into here.”

Mr Mawhinney said Challenger’s outlook was “hugely dependent” on the interest rate cycle and credit spreads. “A lot of their fortunes are outside their control.”

At the investor day in June, Challenger lowered its capital requirements to avoid having to sell equities during another market meltdown. Mr Mawhinney said this was one of the main issues investors were concerned about and it was evident the board had acted.

“In my opinion, Challenger’s business has been run too pro-cyclically in the past. It was the same in the immediate aftermath of the [global] financial crisis when Challenger again got into trouble,” Mr Mawhinney said. “I think it’s a better business now, it’s a relief they’ve changed their capital targets.”

Mr Forster agreed that Challenger’s long-term outlook was strong, following the release of the federal government’s retirement income review that has promoted a greater focus on retirement solutions.

“I do think there is a strong longer term outlook for annuities,” Mr Forster said. “And Challenger is the leading company providing solutions in that space.”

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