‘Longitudinal study’: Japanese bank repositions Aussie lender’s owners

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Australian dollars are seen in an illustration photo February 8, 2018. REUTERS/Daniel Munoz

KKR and its partners are finally getting some credit for their 2015 buyout of General Electric’s consumer finance business Down Under. Japan’s Shinsei Bank agreed to buy a 10% stake in what’s now called Latitude Financial, valuing the company at A$3 billion ($2.3 billion). That’s roughly what the private equity firm and fellow owners Deutsche Bank and Värde Partners were hoping for in an earlier attempt at an initial public offering.

The Latitude stock sale nearly 18 months ago was the second failed effort in as many years. It didn’t help that they were trying to offload a slug of the company just as Australia’s economy was slowing down after almost 30 years of expansion. The main products are unsecured credit card and other loans. With no deposits, it is reliant on wholesale credit markets for funding. Neither appeals in a downturn.

It appears as if the Melbourne-based company run by Ahmed Fahour weathered last year’s pandemic slump well, however. Although its travel-related credit-card business flopped, annual cash profit of around A$200 million, as reported by the Australian Financial Review, represents less than a 10% dip from its financial year to June 2019. A buy-now, pay-later service that was in its infancy less than two years ago is showing promising growth in the ultra-hot finance segment.

At its core, however, Latitude is a traditional consumer-finance company. It’s no Afterpay, the Australian instalment-payment champion whose shares have nearly quintupled since October 2019, even after a 28% tumble over the past month. A Latitude valuation of some 15 times trailing earnings, implied by Shinsei’s investment, sounds reasonable. It’s lower than the 20 times or more at which incumbents like Commonwealth Bank of Australia trade.

When KKR and friends paid nearly A$8.2 billion for the Latitude enterprise, they used only about A$1.2 billion of equity. The Shinsei Bank deal suggests an internal rate of return of about 16%, according to Breakingviews calculations. And that doesn’t include undisclosed amounts of dividends the owners have paid themselves along the way, which will further improve the figure. It’s a respectable showing after a rocky few years – assuming they can pull off a third attempt to go public sometime soon.