A deal with a fund manager distorts asset allocation

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Australian dollars are seen in an illustrative photo February 8, 2018. REUTERS/Daniel Munoz – RC13EB5B3C00

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MELBOURNE, April 6 (Reuters Breakingviews) – Rob Adams is discovering how difficult it is to be a professional investor. Perpetual’s chief executive wants to create one of Australia’s biggest asset managers by acquiring local rival and owner of JO Hambro, Pendal (PDL.AX) for A$2.4 billion ($1.8 billion). of dollars). With Target’s shares languishing around 15% below the bid price, it’s hardly a ringing endorsement of the suitor’s money management skills.

Adams has built a decent track record in acquisitions, picking up Trillium – a specialist in environmental, social and governance-focused funds – and a majority stake in Dallas-based Barrow Hanley in 2020. Inflows for the two have improved following transactions . It was small transactions, however, that helped Perpetual expand beyond trust banking and wealth management.

Buying Pendal to build a goliath with A$240 billion in assets is more difficult. Adams is trying to capitalize on the market value of his career which has halved since September, putting it just below Perpetual’s. It’s a reasonable strategy, but not so easy to execute. An all-stock deal at a premium of just 12% would have meant Pendal, not Perpetual, shareholders would end up owning more than half of the combined company. Using all the cash would have inflated net debt to a risky EBITDA of 4x 2022, according to Refinitiv data.

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Perpetual’s solution was to offer equity to finance three-quarters of the transaction. The structure gives Perpetual shareholders 52% of the combined package, but leaves very little room to adjust the exchange ratio, a common tactic.

Some A$50 million in planned cost reductions also look disappointing, at around 9% of combined EBITDA for 2023, according to analyst estimates. Taxed and capitalized, they are worth around A$350 million, enough to cover only half the value of the proposed 39% premium. All in all, this is hardly convincing.

However, Perpetual hasn’t had a chance to look into Pendal’s books yet. It’s a quirk of Australian M&A that the process often begins with a “conditional, non-binding and indicative” offer to bring a target to the negotiating table. Upon closer inspection, there might be more fat to cut. Janus and Henderson, for example, identified about 16% of combined EBITDA when they merged in 2016. For Adams, his sensible investment plan requires asset reallocation.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

BACKGROUND NEWS

– Australian asset manager and trust bank Perpetual has offered to buy fund manager Pendal for A$2.4 billion ($1.8 billion), according to documents filed with the Australian Stock Exchange on 4 April. The non-binding offer represents a 39% premium to the target’s close. prices on April 1.

– Under the terms of the indicative agreement, Perpetual would pay in cash approximately a quarter of the value of its offer. Pendulum investors would also receive one share from their new owner for every 7.5 shares they currently hold in the target, giving perpetual shareholders 52% of the combined company. Perpetual expects to be able to reduce its annual costs by around A$50 million.

– Perpetual shares closed down 6.6% on April 4, before rebounding slightly the next day. Pendal’s closed 18% higher on April 4 and gained another 1.5% on April 5, leaving the shares trading about 14% below the offer price.

– Pendal’s board of directors is evaluating the offer, as well as “alternative opportunities” for the company.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

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