KKR shadows Latitude with Pepper bid
A merger of Pepper Group with Latitude Finance Australia may inform the interest of KKR Credit Advisors and a network of investment funds in a takeover likely to be supported by the board.If it proceeds the ASX investment universe will be robbed of a rare non-conforming lender in the finance index and one of the few to warrant the sobriquet "shadow bank".On Banking Day's reading, KKR looks the most viable buyer for Pepper - and maybe the only one, with scant mention of any other interest among observers of Australia's limited non-bank sector. The probable KKR play: another step in a wider rollup of like firms and a leap toward scale for an Australian-centric shadow banking outfit with reach into many western and Asian consumer markets.The run up in the share price of Pepper to a 2017 high this week was jolted by the detail from the company, once it addressed media-driven speculation with bare facts.Pepper yesterday morning clarified (though perhaps also mystified) investors on KKR's views as to the value of the business, comprising a growing (and increasingly global) mortgage origination and servicing platform, one which began in the non-conforming home loans sector in Australia and is now also reaches into prime mortgages.KKR's position, for now, on any offer for Pepper is that it will be made at A$3.60 a share, a level 15 cents short of the ASX closing price for Pepper's shares on Tuesday. That was the day on which the AFR, via its website, revved up speculation that the parties were "in advanced negotiations."The tentative price is also a whopping premium to the $2.10 to $2.50 range in which Pepper's shares traded for stretches of 2016. The KKR price point is still a plausible increment to the low $3 level of Pepper's shares before the first media punditry on KKR's interest less than two months ago.KKR's approach is not yet an offer, with Pepper's announcement to the ASX yesterday dulled by the boilerplate of private equity tyre kickers. The KKR interest, Pepper said, is "an indicative, non-binding proposal ... in relation to a potential control transaction."Pepper's board granted KKR "exclusivity", a nod to the enthusiasm of the group's board to close this sale and perhaps tap into funding pools (on the lending side) with an appetite for sub-prime household credit. The ASX release produced some treasure, as the bidder in the end may comprise much more than KKR's credit division. Pepper set out its suitors as "KKR ... on behalf of itself, certain of its affiliates and/or certain funds, clients or accounts managed or advised by KKR or its affiliates."That sentence is the only crumb in the public disclosure so far on where KKR and the presumably supportive target board are taking this offer.Among conjecture shared with Banking Day by operatives of non-bank entities trading in Pepper's sphere is that KKR must be setting out to engineer an association with or even merger of its quarry with Latitude, an Australian finance firm already under the wing