Back in July, Apollo announced that it was in agreement to acquire a total of ~18% of Challenger. I believe ~15% was a direct transaction with a prior shareholder and the balance was acquired on the open market. While I’m not 100% sure how to think about the diluted share count with the converts / sub debt in place, Apollo paid ~$6AUD / share on an undiluted basis. Book value is ~$5.70 AUD / undiluted share.
Challenger is a top retirement services provider in Australia, much like Athene is in the US. They are just north of $100B in AUM and per Apollo, have a decent asset origination platform to invest their annuity / life insurance liabilities. It has reach into Japan, a market Apollo is supposedly spending a material amount of time on given what its belief of the Japanese TAM is.
Challenger seems to be targeting a 12% ROE with a permanent surplus capital position for rainy days, with recent (’21) performance around 11%. In comparison, Athene does 15% with a substantial excess capital position. Perhaps therein lies the opportunity (Challenger’s CEO of multiple decades is retiring in March as well).
In any case, Challenger aims to pay out 40-50% of its earnings in dividends. The ’21 calendar year was ~$0.20/share with prior non-covid years around ~$0.35/ share, or roughly 3.5% and 6% dividend yields respectively on the current share price. The company is guiding towards full earnings power / 12% ROE in ’22 so at book value one would expect a 6% yield going forward.
Perhaps more interesting to think about is the question of whether Apollo will buy out Challenger. Is Apollo trying to increase its “Spread Related Earnings?” They haven’t been specific on SRE growth – but Marc Rowan has said in the past that they want to make as much money on any single asset that is originated – and making money on both the asset management fee as well as the spread between earnings and liability payouts is the way he accomplishes that (or asset management fee + “ADIP” fee).
I personally think it’s likely that Apollo consumes Athora, its European retirement serves arm that it has a minority stake in today, as well as other international platforms. Challenger is a clear candidate in my mind but only if they can purchase it for book value. And now it’s at book value. Maybe they bid if it hangs around this price or lower for an extended period of time (e.g., 6+ months).
In any case, food for thought.