Perpetual-pendal deal agreed, creates $201 billion asset manager

That consideration consists of between $1.55 billion and $1.66 billion in Perpetual stock and $757 million in cash.

Pendal shareholders will own around 47 per cent of the combined group, with up to three directors from the Pendal board who will be invited to join Perpetual’s board after completion.

The Australian Financial Review‘s Street Talk column reported overnight that the boards of the two rival firms were in talks overnight, hoping to reach an agreement before Perpetual delivers its full-year results.

Perpetual launched a stock and voucher offer to acquire Pendal in April, but it was rejected by Pendal’s board a week later. But both companies confirmed that takeover talks had been reopened in late July.

Perpetual told shareholders Thursday that the acquisition will generate $60 million in annual pre-tax synergies for the first two years and result in “double-digit” earnings-per-share accrual in the first 12 months after the combined acquisitions. Business.

That is expected to happen in late 2022 or early 2023.

It said the acquisition multiple was 8.3 times earnings before cost savings related to the deal and 6.7 times once those savings are taken into account.

“Our board and management view this as a landmark acquisition bringing together two of Australia’s oldest and most respected active asset management brands to create a diversified global asset management business of substantial scale,” said Tony D’Aloisio, who will be president of the combined group.

“We believe the combination represents a strategically and financially attractive opportunity for both sets of shareholders, with our respective strategic ambitions realized significantly sooner than would otherwise occur.”

Perpetual Stock Slide

As Pendal and Perpetual executives sold the merits of the deal to their respective shareholder bases, there was a winner as far as the market was concerned.

Perpetual’s share price fell nearly 8.5 percent before the closing bell, while Pendal gained 8.7 percent.

Perpetual CEO Rob Adams said he was not worried about “a few hours of share price movement.”

“We have to show that we are going to create value for our shareholders through the deal. I am very confident that we will, and ultimately, over time, it will be reflected in the stock price,” he told The New York Times. financial revieww.

“It’s a lot for the market to digest and the investment markets are quite, quite nervous to be honest,” he said, touting what he described as a strong full-year result and a positive outlook.

Pendal CEO Nick Good had initially rejected Perpetual’s advances but has now approved the transaction.

Mr Good told the financial review the difference since April is the “level of engagement” Pendal’s management has had with Perpetual, which involved high-level leadership discussions and visits to fund managers around the world.

“There is a sense that this is not just a cost-driven merger, but is actually about creating a global asset manager that has real growth potential going forward,” he said.

“They [Perpetual] recognize that and there is an enthusiasm to make sure Pendal employees have a meaningful voice in the future of the combined organization.”

Good said the biggest factor in pushing Pendal over the edge was “believing in the potential of the combined organization,” but said the financial terms had become more compelling.

“There is a larger cash component which represents a fairly attractive return for shareholders in the current market environment.”

Central to the deal was Perpetual’s willingness to increase the cash component of the offer as a means of retaining its status as majority owner of the combined business.

Debt does the deal

The $757 million offering will be funded by a new credit facility that will refinance an existing package put in place to finance Perpetual’s acquisition of US fund manager Barrow Hanley. Perpetual said it would not raise new equity capital.

The additional debt will result in a leverage level of 1.7 times gross debt to pro forma earnings and will remain below the company’s target leverage limit of 30 percent.

Perpetual says it will reduce the leverage of its operations once it generates cash flows, but the dividend target of paying between 60 and 90 percent of underlying net earnings will remain.

Adams said Perpetual’s board was conservative, finding the increased debt level “prudent and appropriate” and likely to be paid off “quite quickly.”

“The fact that we have substantial non-market revenue is also important. That gives us a kind of solidity to the financial profile.”

The company also delivered its full-year results on Thursday, reporting a 21 percent rise in underlying profit after tax to $148.2 million. That’s at the high end of the range of analyst predictions.

Perpetual declared a fully paid dividend of 97¢ per share, an increase of 16 percent.

The fund manager said he expected expenses to grow between 4% and 6% “reflecting selective investment in the global operating model.”

Perpetual shares are down 15.8 percent year-to-date, compared with a 7.8 percent drop for the broader market.

While Pendal shares are down 12.4%, in part due to buyout interest, fund managers Janus Henderson, Platinum and Magellan are down 40% year-to-date.

At the end of July, Perpetual reported $4bn of outflows from its Australian and international funds in the June quarter, as total assets under management fell 8 per cent to $90.5bn.

Meanwhile, Pendal experienced a larger outflow of $4.2 billion, fueling speculation that a union would be on the cards.

Good also struck an optimistic tone after a brutal quarter of outflows in which clients withdrew more than $4 billion from funds owned by Pendal. He said that with six weeks to go, the September quarter “was shaping up pretty well for us.”

“While you can’t avoid that dynamic, particularly outside of the US across the book, our quarter is looking pretty good.”

Perpetual’s Adams admitted that financial markets were “tough”.

“It’s an inflationary environment that feels like it’s going to stick around for some time. People are still worried about geopolitical issues that are affecting confidence levels and all of those things that come into play right now,

“Our job is to provide superior performance to our customers. We’re doing incredibly well.”

Good was named CEO of Pendal in March 2021, and now that the deal is done, his future is uncertain.

“My goal is to make sure we get to the finish. That is really the priority. As for what happens after that, we have plenty of time to figure it out.”

Analysts react

Meanwhile, analysts weighed in on the transaction, which has been months in the making with mixed views on its merits.

Credit Suisse analysts said the deal carries risks, specifically funds under management attrition, the risk of key personnel leaving, rising debt levels and the potential for the valuation to suffer as the combination unravels. business “leans toward lower-margin offshore asset management.”

Morgan Stanley analysts described Perpetual’s full-year result as “strong.”

“We appreciate the financial merits of the deal, but see exit risks due to some overlap.”

UBS analysts described Pendal’s shareholder consideration of 16.8 times consensus anticipated earnings as “a healthy multiple” and added Thursday’s news should have supported Perpetual’s share price despite that he remained “skeptical about asset manager mergers”.

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