Pendal signals better fund flows in rejection of $2.4bn Perpetual bid

CEO Nick Good is adamant the fund manager has reached a ‘turning point’, as Pendal rejects Perpetual’s $2.4bn bid and downplays the prospect of a rival offer.

Pendal, led by CEO Nick Good, has rejected a takeover offer for the company by Perpetual.

Pendal Group chief Nick Good says he is adamant the fund manager has reached a “turning point” for fund outflows, justifying its decision to rebuff a $2.4bn bid by Perpetual and downplaying the prospect of a rival offer.

Pendal’s board knocked back Perpetual’s April 1 offer on Tuesday, saying it “significantly undervalues” the fund manager, and at the same time announced a defensive $100m buyback of shares. The deal rejection puts the spotlight firmly on Perpetual, given suitors seldom put their best offer forward in their initial bid.

Mr Good said Pendal had completed a thorough assessment of Perpetual’s offer and concluded it didn’t represent sufficient value for investors.

“We looked over all of what we thought the combination of the two would look like, that‘s obviously a consideration,” he added in an interview.

“But it was one factor in many other factors that we looked at. Part of it was obviously, the biggest part of it was the value that we think the organisation is worth, the Pendal organisation.

We’ve been saying for some time that we felt the stock was oversold … We have a huge amount of conviction in what we‘re looking to do here.”

Asked whether Pendal and its advisers had fielded other buyer interest since early this month, Mr Good said: “Events like this are always going to trigger conversations … but at this stage there‘s nothing to report.”

Mr Good shrugged off negative forces weighing on the sector, including downward pressure on fees and a move to more passive investing, saying Pendal’s diversified model positioned the company in good stead to go it alone.

“The reality for us is we‘ve seen relatively little price compression across our book in the last few years. And I think part of that comes from the diversification of our book of business,” he said.

Pendal on Tuesday again highlighted that Perpetual’s scrip and cash bid represented a slim 0.3 per cent premium to the company’s 180-day volume weighted share price.

“The Pendal board has assessed the indicative proposal and unanimously determined that it significantly undervalues the current and future value of Pendal and is therefore not in the best interests of shareholders,” the company said.

Perpetual’s offer landed with Pendal’s Deborah Page-led board late on April 1, with the suitor keen to say the bid reflected a premium 39.2 per cent to Pendal’s closing share price that day.

Pendal outlined an on-market share buyback of up to $100m on Tuesday, noting it had been conducting a capital management review since the start of the year, recognising the stock had “been undervalued”. The buyback – which some analysts have been pushing for over many months – will start after the release of Pendal’s interim results in May.

In a separate funds under management update, Pendal’s net outflows were stemmed to $700m for the March quarter following a torrid prior period which saw hefty outflows of $6.8bn in the December quarter. Excluding cash, the outflows amounted to $1.6bn.

The curbing of outflows came, though, as Pendal’s total FUM dropped to $124.9bn in the March quarter, from $135.7bn three months earlier amid volatility in global financial markets and currency prices.

Pendal’s shares were down 0.2 per cent to $5.29 on Tuesday, still well above a pre-bid closing price of $4.48, while Perpetual’s stock dipped 0.4 per cent to $32.15. A marriage between them would result in a firm with almost $240bn in funds under management.

Investors and analysts will be closely watching Perpetual’s next move, particularly as several tipped it had scope to raise the cash component of its bid.

Washington H Soul Pattinson and Company’s chief investment officer Brendan O’Dea said he was “very supportive” of the Pendal board’s decision to rebuff Perpetual’s bid.

“A logical response from the Pendal board. The opening bid was not adequate,” he added.

Credit Suisse analysts said: “Pendal did not open their books to Perpetual for due diligence (which could potentially lead to a binding offer) which suggests the offer may be someway below the board's expectations.” They noted Pendal was carrying about $250m in net cash at the end of financial year 2021 and a further $260m of seed investments.

“We believe a buyback of this size could easily be funded out of existing resources while allowing Pendal to maintain a strong balance sheet and portfolio of seed assets … We note that Pendal should have potentially scaled back the (share purchase plan) conducted in July 2021 (which was significantly above our expectations) rather than raising equity only to undertake a buyback less than a year later.”

In rejecting the Perpetual offer, Pendal’s board said it assessed its own track record and investment talent, that the firm is well capitalised, and that is has brought sustainable and impact investment capabilities to market. It stressed its distribution across the US, UK, Australia and Europe, which Pendal said were “not adequately recognised” in Perpetual’s offer.

The non-binding bid was pitched at one Perpetual share for every 7.5 Pendal shares plus $1.67 cash. That represents an indicative offer value of $6.23 a Pendal share, based on April 1 prices.

Mr Good – who made his way to Australia from the US last week to help lead bid deliberations – said he believed Pendal was turning a corner on fund flows. “My general sense is that we‘re we’ve seen a turning point where we are broadly in positive momentum. And I’m particularly pleased with what we’re seeing out of Europe … we’ve seen positive flows and a real engagement from one of our key strategic clients,” he added.

“Of particular note were positive flows into (Europe, the UK and Asia) segregated mandates, including a sizeable additional investment from St James’s Place … We‘ve seen steady inflows from (St James’s Place) over the course of recent months. And we expect that to continue and possibly increase.”

St James’s Place in December yanked a key funds mandate from Magellan Financial.

On fund flows, Morgan Stanley’s analysts said Pendal’s quarterly outflows exceeded their expectations.

“We think it will be challenging for Pendal to return to inflows in the near term given soft momentum in retail, legacy Westpac outflows, modest range of new strategies and industry-wide pressures in EU equities,” they added.

Pendal’s funds update also said that as at March 31, its Australia performance fees for the year ending June 30 were $6.2m. However, the company noted the fees would not be determined until the end of the period and remained “highly variable” until then.