Soul Patts lobs $3bn takeover bid for Perpetual

High drama for Perpetual shareholders as Washington H. Soul Pattinson disclosed a $3bn takeover offer just hours after Perpetual suddenly announced a strategic review.

Perpetual has rejected a $3bn takeover offer from conglomerate Washington H. Soul Pattinson on a day of high drama after the fund management giant had earlier surprised the market with a plan to break up its business in a bid to unlock value.

Soul Patts, the largest shareholder in Perpetual, submitted its non-binding, indicative offer to buy 100 per cent of Perpetual’s share via a scheme of arrangement more than two weeks earlier.

It was the latest in a number of takeover offers for Perpetual spanning back to 2010.

But rather than disclose Soul Patts’ offer to the market, Perpetual decided to inform the ASX early Wednesday of a strategic ­review.

It was aimed at unlocking value from its corporate trust and wealth management businesses after its $2.5bn acquisition of rival Pendal Group early this year.

All of a sudden, the 137-year-old global financial services company had all options on the table.

At that stage, the only known catalysts for a strategic review by Perpetual were that its share price hit a 24-year low of $18.70 in October and the fact the powerful conglomerate chaired by Robert Milner had become a substantial shareholder.

Soul Patts’ total economic interest, including equity swaps, had risen to 9.99 per cent, making it Perpetual’s biggest shareholder and putting itself in a position to extract value from the smaller wealth manager.

Soul Patts first disclosed a total economic interest of 7.3 per cent in September, just weeks before Perpetual bottomed with the broader share market.

Perpetual’s share price then proceeded to rebound by more than 20 per cent.

Soul Patts’ rapidly growing presence on its share registry would presumably lead chairman Tony D’Aloisio and chief executive Rob Adams to try harder to create value for shareholders.

On Wednesday morning, Perpetual said that, at its AGM in October, it had “highlighted that our growth strategy had provided Perpetual with three quality businesses of scale, which enabled the board to assess additional strategic options that may arise, to maximise value for our shareholders”.

Since the AGM, it had evaluated those strategic options and said it would be exploring the benefits of unlocking additional value for shareholders through a separation of its Corporate Trust and Wealth Management businesses, and creating a more ­focused Asset Management ­business.

“The review is being progressed by Perpetual’s board of directors and is in line with the company’s regular evaluation of opportunities to create value for shareholders,” Perpetual said.

But there was still no mention of Soul Patts’ takeover offer made two weeks earlier.

It was only after Soul Patts decided, after the close of business on Wednesday, to announce its takeover directly to the ASX – rather than wait for its target to disclose it – that Perpetual responded.

Washington H. Soul Pattinson chairman Robert Milner.

Unsurprisingly, it rejected the takeover offer. Perpetual said it materially undervalued the company and its businesses, offered Soul Patts shares as consideration, was conditional on the demerger of Perpetual Asset Management, introduced significant execution and operation risk over a protracted implementation period, and consequently might have negative value implications for Perpetual shareholders. But the battle has only just begun.

While welcoming Perpetual’s strategic review, Soul Patts said it wanted to engage with its board and other shareholders to progress its proposal which it “strongly believes is in the best interests of all shareholders”.

Under the indicative proposal, Soul Patts would acquire 100 per cent of the shares in Perpetual by way of a scheme of arrangement and undertake a simultaneous demerger of Perpetual Asset Management, distributed in-specie to existing Perpetual shareholders.

Soul Patts would retain 100 per cent of the Perpetual Wealth Management and Perpetual Corporate Trust businesses in exchange for shares, as well as assume responsibility for all group net debt and stranded group costs. Soul Patts said its proposal “provides a unique opportunity for Perpetual shareholders to unlock value in a tax efficient structure while retaining exposure to each of Perpetual’s three businesses”.

It implied an equity value of $3.06bn, with Soul Patts scrip worth $1.06bn, and Perpetual Asset Management scrip worth about $2bn. It is equivalent to $27 per Perpetual share and a total enterprise value of $3.53bn. The premium was 23.1 per cent based on the closing price on November 20 when the offer was made.

It came after a tough year for Perpetual. In September, it swung the axe on two of its global funds as it digested increased costs associated with its takeover of Pendal.

In August, Perpetual reported a 42 per cent drop in annual profit after its takeover of Pendal.

Like many of its active funds management rivals, Perpetual has struggled to attract new dollars and retain existing investors because of a growing trend towards lower-cost and often better-performing index funds. The Pendal takeover, which was completed in January, was sold to investors as a way of achieving scale. However, the company has experienced worse than expected funds outflows.

Rob Adams recently took on an expanded role under a restructure announced in August.

He now has a dual role as CEO of asset management, without an increase in pay.

Partners Group offered $1.3bn for Perpetual’s Corporate Trust unit last year.

Regal and BPEA EQT also launched a buyout proposal for Perpetual in November last year at $30 per share ($1.7bn) before sweetening the offer to $33 per share ($1.9bn) on November 10.

Both bids were rebuffed by Perpetual, which said they undervalued the company.

Analysts value the corporate trust and wealth units $1.7bn to $2.2bn, about 80 per cent of Perpetual’s current market capitalisation, but asset management makes most of its profits.

JPMorgan’s Siddharth Parameswaran said the asset management unit could be worth 10 times earnings or $1.9bn.

“We think the asset manager may be undervalued by the market,” said Morgan Stanley’s Andrei Stadnik. He said the market valued it at 5-6 times earnings, versus his valuation of 8.3 times.