Washington H. Soul Pattinson and Milton Corp to merge

The move is the first of the bigger listed investment funds to merge in recent years and is expected to kick off a round of deals among other funds looking to rapidly increase scale.

Washington H Soul Patts CEO Todd Barlow. Picture: John Feder

Washington H Soul Pattinson will add $3.6bn to its war chest when it merges with ASX-listed Milton Corp, boosting managing director Todd Barlow’s firepower as he looks to beef up the conglomerate’s portfolio with unlisted assets and global equities.

The investment house on Tuesday outlined plans to scoop up listed investment company Milton in an all-scrip merger that will take its market capitalisation to $10.8bn.

The move is the first of the bigger listed investment funds to merge in recent years and is expected to kick off a round of mergers among other funds looking to rapidly increase scale as they battle against an investor rush toward listed exchange traded funds (ETF).

Soul Patts, which owns major holdings in Brickworks, New Hope Group, TPG Telecom and Australian Pharmaceutical Industries, already owns 3 per cent of the listed investment company, or LIC, and both companies are chaired by Robert Millner.

Milton shareholders will be offered Soul Patts scrip as part of the deal, and has been backed by its independent directors, with the listed investment company’s shares to be valued at $6 – a 10 per cent premium to its adjusted net tangible assets, and a 20 per cent premium to the $5 share price it closed at on Monday.

Milton shares surged on the news, climbing as much as 16 per cent to $5.80, while Soul Patts’ shares closed up 0.8 per cent to $30.50.

Mr Barlow, who has led Soul Patts since 2015, said the tie-up would mean greater portfolio diversification and a bigger war chest for future investments.

“This is a transformative merger bringing together two of Australia’s great investment companies to create a $10bn group with enhanced liquidity, diversification and access to a broad range of asset classes.

“Milton’s current portfolio is primarily Australian listed equities but inside WHSP we believe there is an opportunity to further diversify the asset classes over time.

“Both WHSP and Milton have a long history of investing in listed Australain equities and will maintain a strong weighting to this asset class. However, we see an exciting opportunity to increase our weighting into private market asset classes, including private equity, direct credit, real assets and property,” he said.

WHSP has been increasing its exposure to private equity and direct credit, Mr Barlow said.

“We’re also seeing a lot of opportunities in the high growth, pre-IPO unlisted small cap space, where WHSP has been generating very solid returns in recent times.”

The merger comes amid a period of consolidation at the smaller end of the sector following a decade of growth, as ETFs charge ahead while many listed investment companies trade at a discount to their net tangible assets.

Further consolidation in the sector is likely, fund manager Geoff Wilson said.

“The ETF industry was always going to grow at a multiple to the LIC industry because ETFs are open-ended structures, so they can raise money at any time.”

LICs, meanwhile, are closed-ended and constrained in their ability to raise capital.

Mr Wilson, whose WAM Capital will jump from fourth to third-largest LIC when Milton is swallowed up by the conglomerate, recently launched the $225m WAM Strategic Value fund, with the ticker WAR, to hunt down underperforming LICs.

The merger will see Soul Patts, one of the oldest listed companies on the stock exchange, jump from its current 91st position in the ASX100 to 54th, providing it with a further liquidity boost.

As part of the deal, Milton shareholders will receive three fully franked dividends totalling 52 cents per share, including an assumed 8c per share Milton final dividend for the current financial year, a special dividend of 37c per share, and Soul Patts’ assumed final year dividend of 7c per Milton share, for shareholders on the register in mid-December.

Soul Patts, which owns major holdings in Brickworks, New Hope Group, TPG Telecom and Australian Pharmaceutical Industries, already owns 3 per cent of the LIC and both companies are chaired by Robert Millner. The appeal of Milton was its size and management team, Mr Barlow said.

“We expect the transaction will be both NTA and operating cash accretive, which facilitates higher dividends for our shareholders,” he said.

“We’ve been seeing a growth in our deal flow around private markets transactions, so private equity, real assets like agriculture, property, and direct credit. We also think that’s really valuable deal flow and good risk-adjusted returns that people want to get access to.

“One of the ways that we need to fund that is through the merger with Milton,” Mr Barlow said.

Private markets represented better value and better returns than listed equities, he added.

The merger will also see it expand its global equities holdings.

Milton managing director Brendan O’Dea said the merger was a very appealing transaction for shareholders.

“We think it makes a lot of sense absent any view on industry consolidation or discounts to NTA,” he said.

The fund’s largest shareholders have so far been “favourably disposed” to the deal, he added.

The tie-up is also a positive for the rest of the industry, according to Mr Wilson.

“The sector is capitalised at about $54bn. So if you take $4bn out (with Milton exiting) in theory that money will go back into the sector, so everyone else’s valuation will go up. You would assume that, in time, the $4bn would gravitate back to LICs.”

The merger has been unanimously recommended by Milton’s independent directors, subject to an independent expert concluding that it is in the best interests of Milton’s shareholders and in the absence of a superior proposal.

It is also subject to Milton shareholders approving the deal in September, with completion expected by early October.