A hefty $500 million tax bill threatens to scupper a multibillion dollar blockbuster deal between 138-year-old local wealth powerhouse Perpetual and a US private equity giant.
Perpetual has been blindsided after the Australian Taxation Office told the fund manager in writing that its tax liabilities were far greater than it had anticipated. The tax burden would erase the franking benefits for Perpetual’s shareholders, making the proposed $2.2 billion deal with US private equity outfit KKR for Perpetual’s brand, corporate trust and wealth assets unattractive for investors.
New Perpetual CEO Bern Reilly (right) was not supposed to inherit a mess. But he has.Credit: Louise Kennerley
In a statement to the stock exchange on Tuesday, Perpetual said it would need to pay the ATO between $493 and $529 million, far exceeding the $106 million to $227 million range it had advised in August.
This would lead to shareholders being paid between $5.74 to $6.42 a piece – down from the $8.38 to $9.82 per share as previously assumed.
In a further blow, the ATO also advised the shares would be deemed to be an assessable unfranked dividend, meaning the payout to shareholders would be taxed at their marginal rates. Perpetual shares fell almost 9 per cent on the news. The stock is down over 22 per cent this year.
”Perpetual is extremely disappointed and disagrees with the Commissioner’s views,” it said in a statement to the ASX.
“Perpetual considers it has strong grounds to dispute this position. However, to do so, Perpetual would need to withhold sufficient funds to cover the ATO’s asserted corporate tax liability amount from any shareholder proceeds under the scheme until completion of that process, which would be protracted, would only commence once Perpetual was assessed and there would be no certainty of the outcome.”
The deal cannot be simply revived by KKR raising its offer by about $300 million to pay for the difference in tax liabilities, as a higher offer by the private equity firm would likely raise the tax bill, including for shareholders given the shares are not franked.
KKR agreed in May to buy Perpetual’s wealth management and corporate trust units, as well as the brand name, for $2.2 billion following a lengthy sale process. The asset management side of the business would remain as a standalone.
But analysts and fund managers now believe the ATO’s ruling was a potential “show-stopper” for the deal.
Perpetual said it was engaging with KKR to consider the potential impact of the ATO’s ruling on the proposed transaction.
“PPT suggests it is still ‘engaging to consider the potential impact of the transaction’ but it seems highly likely today’s news will be a deal show-stopper,” Citi analyst Nigel Pittaway said in a note to investors.
“Although it could, in theory, dispute the ATO’s stance, the practicalities of this are likely to be considered as too difficult. It seems hard to see the independent expert now being able to recommend the deal as being in the best interest of shareholders while a shareholder vote would also be unlikely to proceed.”
Meanwhile, Morningstar analyst Shaun Ler said he believed there was a “low likelihood” of the transaction in its current form going ahead.
“It is also uncertain if KKR will improve its offer for [corporate trust] and [wealth management arms], given Perpetual’s apparent urgency to finalise the deal,” Ler said.
Analysts at Bell Potter told clients that Perpetual would benefit from retaining the divisions it was selling to KKR, given the ATO’s ruling.
“We suspect that this level of tax liability will not be acceptable to the majority of PPT shareholders,”
Bell Potter analysts said.
“Our initial estimates suggests there is no upside to proceeding as proposed, even if there was a chance of appealing the tax ruling.”
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