‘A joke’: The $2.2b deal with no detail that has left investors fuming

Talk about a deal that backfired. When one of Australia’s oldest and most storied financial institutions, Perpetual, announced it would be broken up, the whole idea was to create value for its shareholders. The champagne was iced and ready to pour.

Perpetual inked a deal to sell two of its major divisions and its brand to private equity giant KKR for $2.175 billion – which it believed was a stellar outcome and an “exceptional result”.

Perpetual chief executive Rob Adams defends selling assets to KKR.Credit: Brook Mitchell

What happened next didn’t go according to plan.

Hostilities broke out, and Perpetual’s share price sank by more than 8 per cent, leaving its bruised and retiring chief executive, Rob Adams, and chairman, Tony D’Aloisio, to don flak jackets as they stumbled through a call with pitchfork-wielding investors.

During the testy hook-up, one analyst branded the deal “a joke”, telling Perpetual’s board and management that it didn’t have the trust of the market.

This is in part a hangover from last year’s extremely unpopular acquisition by Perpetual of fellow asset manager Pendal. That was one for the history books.

Perpetual’s former equities chief and rock star fund manager Peter Morgan piled on, reportedly calling on the chairman to resign.

Another participant in Wednesday’s investment briefing professed that in his 42 years of market experience, he could not understand how this deal could be put to shareholders when the basic fundamentals were either unknown or not given to shareholders.

It seems that the shareholder cohort has more than a bit of doubt that this deal will live up to Perpetual’s motto:“To create enduring prosperity.”

The controversial deal announced on Wednesday is simple enough. Perpetual, a financial conglomerate, is selling two of its three businesses, the wealth management and corporate trust divisions to private equity behemoth KKR for $2.175 billion. The third arm of Perpetual, its well-known Asset Management business, will remain a standalone entity and will continue to be listed on the Australian stock exchange.

The contentious element to this announcement is that Perpetual wasn’t able to tell investors how much of that $2.175 billion in cash would end up in shareholder hands.

It seems there’s more than a bit of doubt among its shareholder cohort that this deal will live up to Perpetual’s motto,“To create enduring prosperity”.

Out of this amount must come transaction costs, separation costs and the repayment of $700 million in debt. However, the sum of elements was not supplied, so shareholders were left to guesstimate the size of the cheques they would receive next year on completion. They will receive far more detail and an independent expert’s report before voting on the transaction early next year.

(The history of similar transactions in this sector shows that transaction and separation costs run between 7 per cent and 20 per cent of the purchase price, and Adams is guiding its deal towards the lower end of that range.)

But until this information is provided – in about three months – at least one analyst told the company that shares would be traded in an uninformed market.

Perpetual chairman Tony D’Aloisio.Credit: Steven Siewert

“How can you recommend a deal when you haven’t done the detailed work? I think this is a joke; you are telling us that this is the best deal in the market, but you can’t even tell us what it is,” spat one analyst.

Fair enough. But in Perpetual’s defence, it looks better than previous offers. At least on paper, it appears more generous. Much will depend on rulings from the Australian Tax Office – which is outside Perpetual’s control.

It would be too convenient for Perpetual to blame all this investor antagonism on a couple of outspoken critics. The share price response sends a clear signal that the market is unimpressed.

Perpetual investors are now set to receive an unspecified cash payment (early next year) and will continue to hold shares in a slimmed-down asset management company, whose recent performance needs improvement, given it has sustained outflows in funds under management.

The last two quarters have been poor, with net outflows not what we would like. In calendar year 2023-24, it had two flat quarters and two negative quarters.

But Adams said total assets under management had gone up because of investment performance and positive currency movements.

Adams and D’Aloisio now have the challenge of convincing sceptical investors that this deal is worthy. That won’t happen until Perpetual shows them the money.

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