Perpetual’s Pendal takeover is ‘fair and reasonable’

An independent expert report has recommended shareholders back the $2.7bn deal, but warned there are risks if key investment managers decide to leave.

Nick Good is the chief executive of Pendal. Picture: Britta Campion

Pendal shareholders will vote on whether to approve the takeover of the fund manager by its larger rival Perpetual just two days before Christmas, with an independent report finding the deal was “fair and reasonable”.

Perpetual had unsuccessfully attempted to stall its bid for Pendal after finding itself the subject of a takeover offer from another investment manager, Regal Partners, which was being backed by private equity firm EQT.

Prepared by Kroll, the report found Pendal shares were valued at between $4.87 and $5.71, while the deal values them at between $5.04 and $5.62. Pendal shares on Tuesday rose 2c to close at $4.85.

“Since the announcement of the scheme, we have seen a continuation of high volatility in financial markets and the lowering of global growth expectations,” said Pendal chairman Deborah Page. “The volatile backdrop and outsized impact of falling markets for asset managers have reinforced the strategic rationale for the transaction, as a combination of Pendal and Perpetual would create a larger, more diverse business that is more resilient across different market cycles.”

Fund managers have been consolidating in recent years to try find scale as more investment dollars move into lower fee paying exchange-traded funds.

In its report, Kroll noted that Pendal did not have non-market linked services as Perpetual did.

“Pendal, therefore, has a greater exposure to the cyclicality of share markets than Perpetual,” it reads. “Pendal’s dependence on a few key investment personnel to generate revenue. The loss of any key investment personnel would negatively impact Pendal’s future financial performance”

Perpetual’s move on Pendal has not been endorsed by all investors. Perpetual’s shares have been targeted by short-sellers at times and on Monday the firm’s long standing head of Australian equities Paul Skamvougeras – who is believed to be against the takeover – resigned.

Mr Skamvougeras’ departure has prompted at least one ratings agency, Lonsec, to seek more information from Perpetual in a bid to “discuss these changes and the transition plan”. “Lonsec will assess any rating impact at that stage,” the group, influential among financial advisers, said.

The Kroll report notes, among risks relating to the takeover, that “the loss of key personnel or any delay in their replacement, may adversely affect Pendal’s future financial performance”.

“This risk may be heightened if the creation of the combined group prompts Pendal fund managers to pursue opportunities outside the combined group.

“Pendal has been in frequent communication with key personnel and fund managers and understands that the scheme has the strong support of key personnel and fund managers.”

Perpetual shares have fallen 29 per cent this year and are now trading below the two now-rejected non-binding takeover approaches of $30 and $33 per share by the Regal-led consortium. Perpetual closed 1.2 per cent lower, down 31c to $26.24.

Perpetual was able to revise its offer last week so that Pendal shareholders will receive 1 newly issued share in Perpetual, in exchange for 7 Pendal 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 new deal sees Pendal investors left with slightly more of the combined company, at 48.9 per cent from the first agreed 47 per cent, and the cash component dropping by $125m leaving it in a stronger position to face ongoing stock market volatility. The new agreement – if confirmed by shareholders – will see Perpetual buy a company 1.5 times its size and increase its leverage at a time when markets are highly volatile.