Perpetual to proceed with $2.7bn takeover of Pendal

But a new higher scrip, lower cash offer means Pendal shareholders will hold 48.8 per cent of the combined company.

Perpetual looks likely to proceed with its $2.7bn takeover of rival fund manager Pendal – although under revised terms that include more scrip – after the Supreme Court of NSW ruled that it could not stall its bid in the hopes its own suitor might come back with a higher offer.

The funds manager had hoped to put its deal with Pendal on ice in case Regal Partners and EQT’s Hong Kong unit Baring Private Equity – which have made two since-rejected offers of $30 and $33 per share offers for Perpetual – come back with a higher offer.

Perpetual, whose shares fell 14 per cent on the news, had argued in court that proceeding with the scheme of arrangement takeover of Pendal without taking the time to engage with the Regal consortium would be a breach of the Perpetual board’s fiduciary duties, because it might deliver a better outcome for shareholders.

“I do not accept this places them in an impossible position,” Federal Court judge Ashley Black said as part of his ruling on Thursday.

Perpetual had also argued that the agreed $23m reverse break fee should be compensation enough for Pendal if it walks away. This too was dismissed by Justice Black, who ruled that this would cover the costs of working on the transaction, but not to cover the costs of the implied value from bringing the two companies together.

Atlas Funds Management chief investment officer Hugh Dive said the $180m increase in the market value of Pendal during the day showed what the market thought the actual value of Perpetual walking away my cost.

Mr Dive said he was “very pleased with the outcome”, as a Pendal shareholder.

The legally unprecedented case will certainly lead bankers and lawyers to rethink how they word agreed takeovers. Indeed, if Perpetual had have won the right to simply walk away – which could not happen in the case of a straight takeover, it might have spelled the end of scheme of arrangement mergers.

It’s likely more agreed takeovers will include carve outs for both companies to consider rival bids – in this case just Pendal had that carve out – and a rethink on reverse takeover break fees, which by practice rather than any ruling have been set at 1 per cent of total consideration, are set out. In the US, they average 7.5 per cent.

In a win of sorts for Perpetual though, it has revised its agreed offer so that Pendal shareholders will receive 1 newly issued share in Perpetual, in exchange for 7 Pendal ordinary shares and $1.65 cash a Pendal share.

That compares to the original offer of 1 newly issued share in Perpetual in exchange for 7.50 Pendal ordinary shares and $1.976 cash per Pendal share.

The two companies will return to court on Monday to hear the date for Penal shareholders to vote on the scheme.

Perpetual, led by Rob Adams, has struck a revised merger deal with Pendal as its future hangs in the balance. Picture: John Feder

Pendal is believed to have agreed to the higher scrip, lower cash offer after discussions on available cash at Perpetual following last Friday’s court hearing. Pendal shareholders will hold 48.8 per cent of the combined company should the deal proceed, which is an increase on the previous agreed deal which saw it take 47 per cent.

“No one wants to be dragged into a marriage,” said one Pendal insider on agreeing to the new terms, adding that Pendal shareholders will own so much of Perpetual after the deal that it is in their best interest that the company be in the strongest financial position to cope with global stock market volatility.

No doubt Pendal will have also reevaluated the value of Perpetual shares in the light of the Regal and EQT consortium bid, and as more information has come to light about EQT, Partners Group, and Challenger all showing an interest in Perpetual’s corporate trust business in the past few months.

Whether Regal and EQT return with a higher offer if the Perpetual - Pendal takeover proceeds remains to be seen. There is clear value in breaking up Perpetual, which would be harder to do if the Pendal bid proceeded because it involves scrip.

It may be that Perpetual CEO Rob Adams tries to sell off the corporate trust business for circa $1.3bn after the deal completes, or Regal and EQT could wait to see if shares in the combined entity fall after the takeover if the combined firm starts bleeding funds under management.

Historically mergers between fund managers have been fraught with risks and often end up with the some of two parts – in a funds under management sense – being half what they would have been had the companies remained separate.

Last month month IBISWorld industry analyst, Disha Jeswanth pointed out that when Perpetual and Pendal took over US fund managers Barrow Hanley, and TSW respectively there was outflows of 15 and 8 per cent respectively.

If Perpetual’s takeover of Pendal goes ahead, the merger would be among the top five Australian asset management deals by size, according to Refinitiv. Others of that scale include Mitsubishi UFJ Trust and Banking Corporation’s $4bn acquisition of Colonial First State Global Asset Management, NAB’s purchase of MLC and Commonwealth Bank’s initial buy of Colonial in 2000.

Perpetual shares slumped below the Regal and EQT $33 offer price on Thursday, closing 12.6 per cent lower at $27.59. Pendal closed 10.5 per cent higher at $4.93 while Regal fell 2.9 per cent to $3.40.