Recut merger deal with Platinum Asset Management favours L1 Capital

The merger terms with Platinum have been adjusted to favour L1 Capital.

Market experts have signalled that L1 Capital’s move to recut its merger deal with Platinum Asset Management this month was largely on the cards, and the difference between a deal getting across the line or being called off.

Australian-listed asset manager Platinum last month told the market that L1 Capital had come forward with a proposal that the market has compared to a backdoor listing, where it provides its founders and staff with a window to eventually cash out.

Platinum was last year in the crosshairs of Regal Funds, which offered $530m, or 90c per share.

Now the latest terms of the L1 deal, advised by Macquarie, are that L1 shareholders would own 74 per cent of Platinum, advised by Jefferies, and Platinum shareholders 26 per cent, compared to 75 per cent and 25 per cent earlier.

The combined entity would receive participation in performance fees relating to the first 3 per cent of absolute returns (gross performance net of management fees) generated by the L1 Long Short funds, with any excess performance fees on returns above 3 per cent in LSF distributed to existing L1 Capital shareholders.

In May, when the share price was 57c and its market value was $331.7m, L1 would receive performance fees relating to the first 5 per cent of absolute returns, generated by the L1 Long Short Fund – and excess performance fees on returns above 5 per cent from the fund are distributed to existing L1 Capital shareholders.

Platinum told the market that the parties had progressed and were now seeking to finalise negotiations of the merger.

Analyst Marcus Barnard said in a Bell Potter research note that it was not a surprise that the merger terms had been adjusted to favour L1, given the outflows seen in April and May.

Platinum has seen its funds under management decline by $2bn from $10.3bn at the end of March to $8.3bn at the end of May, driven by outflows of $1.8bn, including a $1bn institutional mandate and negative investment returns of $100m.

Stock picker Kerr Neilson sold down 9.6 per cent of his Platinum shares to L1 before the May announcement, and L1 retains the right to buy the remaining 12.03 per cent stake by way of a call option if another party enters the mix with a rival bid. L1 could own 19.9 per cent before being forced to make a takeover bid.

Bell Potter said this would have made abandoning the merger expensive.

“L1 has clearly sought to improve terms, although apart from the performance fee split, it seems there was little else to negotiate,” it said.

Bell Potter estimates that under the latest terms, L1 would receive around 73m fewer shares in the combined group, worth around $36m, but would retain performance fees that it believed were valued at $143m.

“In other words, L1 has taken around $100m off the table, which is probably a similar amount to the present value of management fees lost on the $1bn institutional mandate.”

Based on the terms in May, it placed a valuation on L1 of about $1bn.

In the $1.8bn ASX-listed investment company L1 Capital Long Short Fund, it has held stocks such as Light and Wonder, Mineral Resources, Imdex, BlueScope, Santos and Viva Energy, along with gold stocks like De Grey Mining and Westgold Resources.

L1 promotes itself as one that invests most of its personal wealth alongside clients in funds and does not allow personal share trading for any staff.