Perpetual eyes debt finance for cash in Pendal tilt, investors push for deal response

Perpetual wants to avoid an equity raising to fund the cash component of its $2.4bn bid for rival funds manager Pendal, and prefers instead to tap debt funding.

Perpetual CEO Rob Adams, above, held meetings this week with more than a handful of institutional investors to discuss the mooted deal.

Perpetual wants to avoid an equity raising to fund the cash component of its $2.4bn bid for rival fund management firm Pendal, and prefers instead to tap debt funding if the transaction gathers momentum, according to sources.

As the suitor awaits a more detailed response to the tilt, Perpetual chief executive Rob Adams held meetings this week with more than a handful of institutional investors to discuss the strategic rationale behind the offer.

Several sources said Perpetual had capacity within its current debt funding arrangements to fund the cash component of the bid, and also wanted to protect the mooted transaction’s ownership split for the combined entity.

The financial advisers of Perpetual and Pendal are said to have had some level of engagement through the week around the offer.

A Perpetual spokesman declined to comment as did a Pendal spokesman.

Under the deal’s proposed terms, Perpetual would emerge with 52 per cent of the combined group and Pendal 48 per cent.

Several Pendal shareholders are understood to be pushing the target’s board to provide a more meaningful response to the offer in coming days, ahead of the firm’s quarterly funds under management update expected in the second half of next week.

The non-binding bid – made public on Monday – sees one Perpetual share offered for every 7.5 Pendal shares plus $1.67 cash. That represents an indicative offer value of $6.23 a Pendal share, based on the buyer’s closing share price on April 1.

Pendal shares gained 17.6 per cent through this week to close at $5.27 on Friday, while Perpetual’s stock finished the week 5.5 per cent lower at $32.34.

The cash component of Perpetual’s offer amounts to $639m and several analysts had flagged the possibility the firm could embark on an equity capital raising to fund that part of the bid.

The Deborah Page-led Pendal board on Monday said it had started assessing Perpetual’s offer but highlighted the bid was made against the backdrop of volatile global markets weighing on the valuation of fund managers. The offer landed with the target company’s board late on April 1.

Pendal’s chief executive Nick Good made his way to Australia in recent days from the US to assist with deal deliberations.

The slated transaction has spurred a range of varied reactions within the investment community.

“Strategically it makes a lot of sense for the two businesses to get together,” said Regal Funds Management’s Mark Nathan.

“At first glance it may appear there is significant overlap between them, but when you drill down into the specific capabilities there is a lot more complementarity than overlap.”

Earlier this week, Washington H Soul Pattinson and Company’s chief investment officer Brendan O’Dea labelled the Perpetual bid “opportunistic”, which was to be expected given the suitor was capitalising on the recent sell off in asset management firms. “It is strategically rational with consolidation in the sector logical in the face of persistent margin compression and the need to have global multi-asset scale to compete,” he said.

“We can see the combination working well on paper but asset management businesses are run by people and there may well be cultural challenges. The Perpetual team may need to sweeten the deal but the scrip heavy deal structure may be a constraint.”

Analysts who cover the stock also raised concerns about cultural differences between Perpetual and Pendal and highlighted challenges around deal execution.

Perpetual’s Australian asset management unit owns a small holding in Pendal as part of its equities portfolio, but the stake is said to be negligible relative to its domestic ASX exposures. Pendal does not own Perpetual stock.

Pendal has Macquarie Capital assisting with its defence, while King & Wood Mallesons is doing the legal work.

Perpetual has Goldman Sachs as adviser and Herbert Smith Freehills tending to legal matters.

The tilt by Perpetual follows a flurry of mergers and acquisitions in the funds management sector globally and locally over the past 12 months.

In Australia, VGI Partners and larger rival Regal Funds Management last month sealed a transaction that created a combined firm called Regal Partners, while Paradice Investment Management sold a 50 per cent stake in the firm to Charter Hall.

Consulting firm OliverWyman in December outlined its expectations for 2022 asset management trends, including tipping further mergers and acquisitions.

“Major industry players will consider mega deals and pursue M&A more actively as the needs of and benefits to scale become too big to ignore,” its report said.

“This includes improved distribution reach; keeping up in the arms race for spending on advanced technology, data, and quantitative talent; gaining access to rapidly growing developing markets; and enhancing operating leverage.

“At the same time, private equity firms will selectively take over mature, bloated businesses (mid- and large-scale) and apply private equity value creation approaches to drive necessary changes that incumbent management teams have resisted.”