Why I’ve changed my mind on CGF, and some thoughts on sell discipline, page-3

Thanks for posting your analysis and methodology. I have found it most beneficial. It’s always fantastic hearing from posters as well-informed and methodical as yourself.

@RGGinvest

You’re welcome.

I notice it is being reported in the AFR Street Talk section that Challenger may be pursuing M&A activity in the US. This acquisition is said to (potentially) alleviate some of the sluggish results you have alluded to.

Do you have any thoughts on this?

I am personally skeptical about the benefits for Challenger from a sizeable (>1bn$, according to the AFR article) acquisition in the US (or Canada), for the following reasons:

a) At the current level of asset prices, globally, it would be hard for the acquisition to be accretive, given that CGF is trading at a PE discount to market and that the deal financing would have to include a large equity component; the AFR article itself says that the Company’s advisers Macquarie recommended that Challenger avoid overpaying and that they revise down their initial offer.

b) The article describes the possible target as “an investment manager”, i.e. not necessarily an annuity provider; my investment rationale for CGF has always hinged around the durability of their Annuity business, thus the further they deviate from that core business the less appealing I will find CGF as an investment proposition.

c) In Australia, Challenger have the double advantage of i) being the market leader in their sector by a large margin, and ii) servicing a market where the penetration rate of annuities is substantially lower than in most other developed economies (hence, much more room for growth, in theory at least). Both these advantages would obviously be lost in a mature and ultra-competitive market such as North America.

d) Why now? If Management were confident in the long-term value of the Australian Annuity business, they should be focussing all their energies in optimising their domestic distribution channels, marketing strategy and product offer, at a time of disruption and regulatory challenges. Venturing into a new market at this juncture, to me, would indicate a lack of conviction in their core business.

But that’s just my two cents.