This was published 2 years ago
Can a dramatic $201b merger keep fund manager Perpetual in motion?
It seemed like a done deal – until it wasn’t.
A tie-up between Perpetual, one of Australia’s oldest asset managers, and boutique rival Pendal had been hailed by the leaders of both firms as a natural partnership, creating a powerhouse overseeing $201 billion in assets under management.
Perpetual, and its chief executive Rob Adams, has knocked back the latest bid for the company.Credit: The Age
But the reaction to the takeover was mixed and – as markets shifted – sentiment quickly soured. Rivals saw an opportunity.
Earlier this month, private equity and hedge fund Regal lobbed a conditional, non-binding indicative $30-a-share bid for Perpetual. The deal was knocked back by Perpetual for “materially” undervaluing the company. The consortium tried again with a sweetened $33-a-share bid, but it was again rebuffed.
The saga then moved to the courts. Last week, a NSW Supreme Court ruling made it harder for potential bidders to make a play for Perpetual – a decision that also means the fund manager could face stiff penalties if it walks away from a plan to buy out rival Pendal.
Perpetual and Pendal also agreed to revised terms. Under the changes, Pendal shareholders will receive less cash per share, but Perpetual will increase the scrip component of the deal.
When the Regal bid was first lobbed, Perpetual stock price rose 7 per cent. But it has dropped almost 20 per cent in the past five days. With its share price being buffeted by these events, is the historic fund manager a good investment?
How it started: Perpetual was founded in 1886 by a group that included Sir Edmund Barton, who would go on to become prime minister. It was listed on the stock exchange in 1964.
How it’s going: Perpetual is now one of Australia’s largest wealth managers. It has offices across Australia as well as subsidiaries in Boston, San Francisco, Portland, London, Edinburgh, Dallas and Hong Kong.
Industry: Financial services.
Main products: Perpetual provides investment products, financial advice and corporate trust services for wealthy individuals, families and businesses.
Key figures: Chief executive Rob Adams. Long-serving head of equities Paul Skamvougeras left the company earlier this week, and deputy head Vince Pezzullo was promoted to the role.
The bull case: Putting the takeover talk aside, one of Perpetual’s strengths is its corporate trust business, which delivers strong revenue growth for the company.
It has fielded interest from outside parties who see value in it, most recently Baring Private Equity Asia which was keen to acquire the company’s valuable corporate trust and private clients businesses.
Perpetual has agreed to new terms in its merger with Pendal.Credit: James Alcock
Among a trend towards consolidation in the sector, Perpetual has also been focusing on building scale through inorganic growth. Two years ago, it acquired US fund managers Barrow Hanley and Trillium, which Morningstar analyst Shaun Ler says “materially improves Perpetual’s earnings outlooks”.
“Unlike its funds management operations (in Australia as well as internationally), we think both the private wealth and corporate trust segments can better withstand the threat of competition, are subject to less fee pressure, and can generate more predictable earnings growth,” he said.
Ler says the three-way tussle between Perpetual, Pendal and the Regal consortium also suggests there is unrealised value in the shares of asset managers, which have languished this year as firms suffered outflows, fee pressures, and struggled to compete against the rise in cheaper exchange-traded funds.
The bear case: There is still some way to go before the merger is finalised. Bell Potter analysts said in a note last week it was a “fluid situation with the initiative shifting between various parties, and we cannot say for sure that the latest development is the last”.
However, most believe signs are pointing to the Pendal deal going ahead. On Monday, the court ordered Pendal to convene and hold a meeting of shareholders to vote on the scheme, which will be held on December 23, and approved the distribution of the scheme booklet, which was released on Tuesday.
Pendal said that an independent expert report found that deal was “fair and reasonable and therefore in the best interests of Pendal shareholders, in the absence of a superior proposal”.
But even if it goes ahead, Morningstar’s Ler believes the acquisition of Pendal is unlikely to be value-accretive for Perpetual over the long term. “We don’t expect any revenue synergies given the considerable overlap in both firms’ strategies and client base.”
“While we envisage the combined Perpetual-Pendal entity will ultimately grow funds under management, this will likely necessitate further expense growth to retain investment staff and clients. Such expenditure may offset the cost savings from removing duplicate operating expenses,” he said.
There’s also a patchy history when it comes to fund management mergers, with challenges stemming from “dis-synergies” such as a struggle to retain funds and complications in melding different cultures. The recent resignation of Paul Skamvougeras also has some raising the possibility of further departures of key staff.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Investors should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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