Shares in Pepper Money Ltd (ASX: PPM) fell sharply on Tuesday after Challenger Ltd (ASX: CGF) lowered its takeover offer for the non-bank lender.
Pepper shares have dropped about 10% to $1.90 (at the time of writing) following the announcement, while Challenger shares have risen around 3%, reflecting investors' view of the changing economics of the deal.
The revised proposal comes just over a month after the original takeover approach sparked a strong rally in Pepper's share price.
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What was the original takeover offer?
On 9 February, Challenger announced a non-binding proposal to acquire Pepper Money for $2.60 per share.
At the time, Pepper shares had closed the previous Friday at $1.76, meaning the proposal represented a significant premium for shareholders.
The market reacted immediately. Pepper's share price surged 28% to $2.26 as investors priced in the possibility of a deal at a much higher valuation.
However, Challenger has now revised its proposal.
The company announced it has submitted a new offer of $2.25 per share, inclusive of Pepper Money's final 2025 dividend of 7.8 cents per share and any potential special dividend.
The updated proposal represents roughly a 13% reduction from the original offer price and has been described as Challenger's best and final offer, unless a competing bidder emerges.
Why did Challenger lower its offer?
Challenger announced that the lower offer reflects "the deterioration in both market conditions and the operating environment".
The move comes as concerns about the state of private credit markets continue to rise. Pepper Money is a non-bank lender, and its industry can be particularly sensitive to changes in funding costs, credit markets, and the broader economic outlook.
If funding costs rise or credit conditions tighten, the profitability outlook for lenders can shift quickly. For an acquirer like Challenger, even modest changes in these factors can materially affect the price it is willing to pay.
What happens next?
Importantly, the proposal remains non-binding, meaning there is still no certainty that a transaction will proceed.
Pepper Money's Independent Board Committee will now consider the revised proposal and determine its next steps.
For now, the share price movements tell the story. Challenger shares rose on the news, while Pepper shares slid as investors reassessed the likelihood and value of the potential takeover.
