Perpetual’s wrong call on tax puts it back in play

Perpetual’s Corporate Trust unit may remain in its hands.

Perpetual’s corporate trust unit is looking less likely to fall into the hands of the private equity firm Kohlberg Kravis Roberts now that the Australian Taxation Office has come out with its ruling on the transaction.

The ATO says the tax bill on the sale will be $493m to $529m – far higher than the $106m-$227m that the company estimated.

As a result, shareholders will receive far less in proceeds – between $5.74 and $6.42 per share rather than $8.38 to $9.82.

Perpetual shares closed 8.4 per cent lower as a result.

Now questions are being asked about why Perpetual and its advisers did not establish the extent of the tax liability before announcing the sale or even before launching the sale process.

When a tax bill is about $400m wide of what it flagged to the market, investors have been misled, and many may be relieved that the deal will not be proceeding.

Some never saw it as the right move for the company, anyway.

According to one observer, one of the reasons Perpetual’s advisers got it so wrong is that there were too many doing too many separate things, and no single lead bank across all of the detail.

Bank of America was the main bank advising on the transaction, while Luminis was advising the board and Goldman Sachs was there because of its history advising the company.

Other investment banks know that their first job in any deal is establishing any bumps in the road early on, and ensuring both the shareholders and the buyers know exactly where they lie from a legal standpoint, to rule out any ambiguity.

That’s exactly what’s currently happening in the Fonterra Oceania sale process, where the dairy co-op is seeking a legal ruling on Bega’s contractual rights for the use of its brand and whether it has the power to block any transaction before it launches next year.

Most of the time, bankers only get paid on the success of a deal – completion.

So in the case of Perpetual, it will be its lawyers that will be the big winners, rather than Wall Street.

Tens of millions of dollars would probably have been spent on fees in this area.

Now the question is what next?

Do suitors Regal and EQT come back and bid for the whole business?

And is this why Regal moved on from Platinum Asset Management?

What about Soul Patts?

And if shareholders vote against the transaction, as expected, does Perpetual demerge corporate trust or does it keep the business together?

It will gain relief from paying capital gains tax on corporate trust in a demerger, so that’s one thing.

But it would probably require an equity raising – something angry shareholders will now be unwilling to support.

They have already had to put their hands in their pockets once to top up the company’s balance sheet, after its merger with Pendal that did not go as well as planned.

A demerger would leave an overvalued asset management unit of Perpetual, according to one market expert.

Analysts at Citi say the ruling “looks extremely unfavourable for the deal’s prospects”.

“This would see significant tax leakage from the deal, and it seems highly unlikely to proceed in the originally proposed form.”

Citi said the hope would be that the new chief executive, Bernard Reilly, can cut costs and enhance returns.

Perpetual announced in May that KKR had agreed to pay $2.18bn for the corporate trust unit, but was unable to provide clarity on the proceeds as it awaited an ATO tax ruling on its capital gains bill.

While the pair are still engaging, Citi believes the latest news is “a deal showstopper”.

If the business sticks together, it will continue to benefit from diversification and the attractive cashflow generation of the corporate trust business.

One of the bright spots from Perpetual’s news on Tuesday is that since the start of the second quarter of 2025, both corporate trust and wealth management have continued to perform strongly, as they did in the first quarter, while asset management’s assets under management continued to grow.