October 16, 2019 / 3:20 AM / a month ago

Breakingviews - Greed and gloom sink KKR’s Aussie lender IPO

Australian coins and notes can be seen in a cash register at a shop in central Sydney, Australia, February 11, 2016. Picture taken February 11, 2016. REUTERS/David Gray

HONG KONG (Reuters Breakingviews) - Aussie backers are learning the hard way that greed and gloom don’t mix. U.S. private equity firm KKR and other investors have scrapped a second attempt to list Australian lender Latitude, after buyers rejected a $2.1 billion valuation. Even after a last-minute price cut, the discount to big banks was too modest. Debt-laden households, struggling with flat wages and precarious jobs, hardly helped.

Deutsche Bank, KKR and Värde Partners acquired the Australia and New Zealand consumer finance unit of GE Capital in 2015. The Melbourne-based credit-cards-to-personal loans company, renamed Latitude, expanded into digital payments and buy-now-pay-later offerings. Both were pitched to prospective buyers as promising growth engines.

Unfortunately, there wasn’t quite enough proven technology to gloss over the consumer finance core. At a reduced A$1.78 per share, Latitude would have been priced at 11 times forecast earnings for the financial year ending June 2020. Sponsors were reluctant to move lower. Yet that made it only a little cheaper than Australia’s high-margin Big Four banks, which trade at 12 to 16 times earnings. It was more modestly valued than loss-making payment rivals like Afterpay Touch and Zip, which trade at 19 and 16 times enterprise value to sales, but not enough, given those snazzier rivals have no old-school lending business to contend with.

The timing was out too. Regulation is still tightening after Australia’s public inquiry into financial services in 2018, which put the spotlight on poor lending practices. But more importantly, Latitude is a bet on unsecured consumer loans at a time when the economy is cooling after three decades of unbroken growth, and spending is in the doldrums. Australian household debt is at record highs, while wages are flat and newly created jobs tend to be part time. 

The market has now rejected an IPO twice in under two years, leaving Latitude’s sponsors with an exit to worry about, and a A$900 million shareholder loan to refinance. KKR and peers are masters at turning debt into profit. Latitude is testing that alchemy to the limit. 

Breakingviews

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