Perpetual walks away from KKR deal

CEO Bernard Reilly says the latest offer from KKR did not provide enough value for shareholders.

Perpetual CEO Bernard Reilly. Picture: Dylan Coker/The Photo Pitch

Perpetual has walked away from its $2.18bn break-up deal with KKR after rejecting the private equity giant’s last-ditch offer to get the transaction over the line.

Perpetual on Monday said it had terminated the scheme of arrangement after the parties were unable to meet on price to salvage the deal for its wealth and corporate trust units.

Perpetual and KKR were locked in negotiations for weeks after the tax office blindsided the wealth manager in December, indicating it would slap a $500m tax bill on the move to separate its businesses and remove any franking benefit for shareholders.

The Australian understands the parties explored alternative structures to unlock value for shareholders but that KKR did not come up from its original $2.175bn bid. The alternative options included a purchase and sale agreement of the wealth management and corporate trust arms that would have come in below $8 a share for certain shareholders due to the tax implications.

ASX-listed Perpetual told The Australian the latest offer from KKR did not provide enough value for shareholders.

“Over the course of the last few months, Perpetual and KKR engaged heavily on working on a solution for shareholders, post the ATO guidance we received in December. When we looked at it from a shareholder’s best interest perspective, we couldn’t get there in terms of value for shareholders,” Perpetual chief executive Bernard Reilly said.

“It has been a long process, and I don’t think any of us foresaw the ATO decision. We worked hard on an outcome for shareholders, and this is not where we thought we were going to be. Rejecting the offer is in shareholders’ best interest, these are three good businesses,” he said.

Under the original carve-up and sale agreement inked last May, Perpetual estimated the larger-than-anticipated tax bill would have reduced shareholder proceeds to as low as $5.74 to $6.42 per share, down from the $8.38 to $9.82 a share it had previously guided to.

After a year of pursuing the wealth manager and walking away empty-handed, KKR says it is owed a break free and potentially further damages. The break fee alone is an estimated $21m. Perpetual disputes the charge and says no fee is payable.

Perpetual will now push ahead with separating the corporate trust, wealth and asset management businesses, with a view to selling off the wealth business. The firm has already incurred transaction and separation costs of $42.6m in the past year, with $24.4m of this to be reflected in the half-year results to be handed down on Thursday.

It will work to streamline and slash costs in its asset management arm as it hunts for a buyer for its wealth unit.

“I believe (the wealth management business) will be better off in someone else’s hands to be able to invest in that business longer term. It is a high quality business and at the moment, those types of businesses are in high demand in the marketplace,” Mr Reilly said.

The wealth manager also on Monday confirmed Gregory Cooper would become the firm’s new chairman from February 27 following Tony D’Aloisio’s planned exit.

The end of the carve-up saga will no doubt infuriate shareholders already frustrated by the drawn-out process. Former CEO Rob Adams and the board were heavily criticised last year because of the tax unknowns when the proposed transaction was first announced.

When it first recommended the deal, shareholders were given no idea what the net proceeds would be, with separation and transaction costs, as well as the hefty capital gains tax bill, all undisclosed at that point.

The wealth manager then came out months later with its estimate for the tax bill — which turned out to be much lower than the ATO’s read — but told The Australian in August it was already considering its options if the deal didn’t go through.

In Mr Adams’ time at the helm, Perpetual went on a global buying spree, with a raft of bolt-on acquisitions including US asset manager Barrow Hanley, ESG investment specialist Trillium and the $2.5bn takeover of rival Pendal Group that gave it scale but also a mountain of debt.

Perpetual’s biggest shareholder, Soul Patts, which lobbed its own takeover offer for the group in 2023, noted the latest announcement on the breakdown of the deal.

“While we are disappointed no transaction has eventuated, we believe there are options available to increase the earnings and value of the company for the benefit of all shareholders,” a spokesperson said.

Activist investor David Kingston of KCapital said he was not surprised the deal had fallen through.

“Obviously KKR were continuing to try (get a deal done) but you’ve got to respect the board. We’re now back to where we were two months ago but the stock has stabilised 15 per cent higher than the $19.80 it got to in December, which highlights that the kneejerk response back then was an over-reaction,” he said.

Perpetual shares closed down 2.3 per cent at $23.22.

Originally published as Perpetual walks away from KKR deal