Share rally the catalyst for KKR’s improved Perpetual offer

Perpetual told the market on Monday with respect to the KKR offer that it ‘contemplates outstanding commercial terms that would need to be agreed’.

A decision by Kohlberg Kravis Roberts to sweeten the deal for Perpetual’s corporate trust and wealth management units comes after the shares of the financial group have rallied about 15 per cent since the start of the year.

It means that in theory, KKR should really be offering over and above what shareholders were initially hoping to receive when the deal was announced back in May last year.

But one argument is that the only reason the New York-based buyout fund has lifted its offer to where it is today is because of the share price run, which means a deal at improved terms is still good value.

While the listed financial group Perpetual confirmed in a statement on Monday that it had received a revised proposal from KKR, it did not outline the terms.

But DataRoom understands the proposal offered additional franking credits, which could take the value of the proposal to $11 per share, or $1.26bn excluding debt.

The buyout fund has effectively put its hand in its pocket to pay some more money, but it has sweetened terms for Aussie investors by paying the dividend from the sale as one that is franked.

This means shareholders can use share trading losses in their portfolios elsewhere to offset the gain they make from the sale, effectively lessening the money they need to pay to the tax man.

Estimates suggest that the deal is about $230m to $250m more than what has been on offer.

Sources believe that even if the stock has rallied, and in theory KKR should put even more money on the table, investors are likely to be keen to take a pragmatic view and be keen to take what is on offer by KKR.

Perpetual’s recently appointed chief executive, Bernard Reilly, is believed to be motivated to push on with a transaction.

Perpetual told the market on Monday with respect to the KKR offer that it “contemplates outstanding commercial terms that would need to be agreed”.

It adds that the net proceeds shareholders would receive under the revised proposal were uncertain at this stage.

The board was assessing the revised proposal and its associated terms, Perpetual said in a statement.

Without the franking credit benefits, it is understood that KKR’s offer for Perpetual’s Corporate Trust and Wealth Management units would be about $8 per share, the price investors had been expecting before a worse than expected tax ruling meant it would be closer to $6 per share.

Perpetual shares on Monday closed up 42c to $23.74.

KKR is revising terms to buy Perpetual’s Corporate Trust and Wealth Management business after agreeing to pay $2.2bn for the units last year.

But the Australian Taxation Office issued a ruling that the tax liability would be $493m to $529m, higher than the $106m to $227m anticipated.

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

As a result, KKR has now come back at the weekend with a revised deal, in what the company said was its “latest” proposal, suggesting other offers had also been put forward.