Why is the Challenger (CGF) share price on fire?
Shares in the financial services giant have already risen nearly 20% over the last 12 months.
Shares in financial services giant Challenger Ltd (ASX: CGF) are among the biggest gainers on the ASX boards on Wednesday. At the time of writing, the stock had jumped nearly 12% to $6.10 and given the unusually high volumes, isn't showing any signs of losing momentum.
What is driving the Challenger stock price?
The Challenger stock price shot up after US-based retirement services provider Athene Holding and private equity firm Apollo Global Management acquired a 15% stake in the Australian investment manager. The 2 investors now have a total 18% stake in Challenger.
Athene purchased the shares at $6 each, a 10% premium to Challenger's Tuesday closing price of $5.47.
The stake buy comes after years of speculation that Challenger could be a takeover target. In the past year alone, private equity firms including The Carlyle Group and Ares Management have been talked about as suitors for the business.
Athene itself is an annuities provider with more than US$200 million of total assets, and is set to merge with Apollo Global.
"Athene and Challenger share the same mission – to provide customers with financial security for retirement," Athene said in a statement.
"Athene and Apollo see attractive long term opportunities in partnering with and supporting Challenger's continued growth as minority shareholders."
Capital intensive business
Last month, Challenger reaffirmed that its FY21 guidance will be at the bottom end of its $390 million to $440 million range, prompting a sell-off in the stock. It also provided an update on its outlook after the disruption from COVID-19 over the last year.
Challenger also raised its targeted prescribed capital amount (PCA) from 1.45 times to 1.6 times in a move to reduce risk and preserve capital, resulting in the lowering of the fund's return on equity.
This comes after a $300 million equity raising last year to strengthen its capital position.
At the same time, its non-annuities businesses continue to perform strongly. Challenger's acquisition of digital bank MyLife MyFinance is on track for completion, while its Fidante funds management business has continued to thrive, winning mandates in the UK and expanding into Singapore.
That could see earnings rise to between $430 million to $480 million in FY 22, giving investors more to cheer about. The Challenger stock was already up nearly 20% in the last year, before Wednesday's jump.
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