Let’s make a deal: Platinum issues three tests for Regal

Phil King’s Regal Partners could be closer to grabbing the elusive fund manager Platinum than he realises.

The combination of Regal and Platinum could make a near $30bn fund manager. Picture: Jeremy Piper

Platinum’s board has signalled it is prepared to do a deal, be that with Phil King’s Regal Partners or anyone else willing to put the right number in front of the elusive fund manager.

King won’t be surprised that this month’s low-ball approach for Platinum fell at the first hurdle. And for the sake of long-suffering investors in Platinum – including co-founder Kerr Neilson – so it should have.

However, what King wasn’t expecting was Platinum’s warm reception to his approach.

The message is, if King can come up with a better offer, he might get his hands around the $12bn fund manager.

Still, there’s three steps needed for Regal to win over Platinum’s board. Then there’s one final hurdle: Neilson himself.

Phil King has seen breakneck growth for his Regal funds. Picture: Jane Dempster

Platinum these days is a shadow of its former self. Ultra-low interest rates worked against the value investor, then geopolitics complicated woes of the China-focused asset manager.

Funds have been steadily streaming out to be less than half of its glory days of past decade.

The first test for Regal is purely around value. Platinum’s board is putting a lens on what the fund manager is worth as an independent manager over the longer term now it has a rebooted strategy under new boss and turnaround specialist Jeff Peters.

China’s economy is still a long way from a sustainable pick-up in growth, which is a big unknown. Peters has already shaken up the running of the funds and launched an absolute return, global equity hedge fund strategy

Platinum investor Kerr Neilson.

Regal’s approach to Platinum has an implied value of $1.10 per share, or $526m, and this offers almost nothing for control.

Platinum’s board, advised by Jefferies Australia, would want to see something well above $1.20. Platinum shares were trading at an all-time low of 93c when Regal lobbed its offer and they are currently trading around $1.16.

Still, expectations have been set low so that makes it easier for Platinum to draw out rival bidders.

Geoff Wilson’s WAM has been prepared to take a passing interest and crash the Regal party to boost his international funds exposure and funds under management.

Earlier, the $12bn Soul Patts ruled itself out of the game. Other private-backed funds could view a merger with Platinum to access an ASX listing.

King’s Regal did exactly this through the buyout of hedge fund VGI two years ago. If Perpetual didn’t have so much on its plate it too, could have been a serious contender.

Long-term value

If the value question is answered, then Platinum’s board will seriously consider what the long-term benefits are for its shareholders of the all-script merger. There’s possible immediate benefits in tapping Regal’s strength in distribution that could stem the funds flow for Platinum.

Regal, too, has growth momentum which has seen its funds surge from $6bn to $16bn in just a few years. A combined fund would be close to $30bn giving scale benefits. This could deliver upside to Platinum shareholders.

Finally there’s the industrial logic behind a potential deal where Platinum needs to be satisfied. There’s a long history of fund managers failing due to cultural issues. What are the synergies from a combination? Also, will a revised investment strategy under King shift the value equation in Platinum?

The biggest test is Neilson himself. The 21.6 per cent shareholder has been unhappy with the performance of his business for some time and exited the boardroom two years ago.

Neilson is Regal’s to be won over, and even though the hopeful buyer has reached out, the former funds boss is in no hurry. Instead it’s up to the Platinum board and a prospective buyer to do the hard work finding better value in the deal.

Neilson faces emerging with a smaller slice in much bigger company. But as a career in value management his calculus will be whether a combination stands to deliver more upside than Platinum will offer on its own.

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Originally published as Let’s make a deal: Platinum issues three tests for Regal