In August, Perpetual ('PPT') and Pendal('PDL') entering into a Scheme Implementation Deed in which PPT would offer PDL shareholders 1 PPT share for every 7.5 PDL shares held plus a fixed consideration of $1.976. At the time of the offer this represented an implied 46% premium to PDL's 'undisturbed' share price.
Ostensibly, the rationale behind this transaction was to provide a combined platform that would be greater than the sum of parts. At the time of the merger, PDL's assets under management (AUM) exceeded PPT's AUM by ~22%. Accordingly, to 'equalise' this AUM bridge; a fixed cash consideration to the value of around $760 million was to be paid to PDL shareholders as part of the transaction.
The cash component is expected to be funded via a debt facility that would encumber the merged entity; with PDL holding 47% of the merged entity whilst existing PPT shareholders holding a mere 53% post transaction. The proposed transaction was unpopular with investors; PPT's stock declined from a price of ~$30 a share to a low of ~$23 a share.
Markets have shifted materially since the announcement of this transaction, with the majority of major fund platforms experiencing strong outflows. PDL itself has experienced outflows of ~10% of AUM relative to PPT which has experienced outflows of only ~1% of AUM. In retrospect, the basis upon which the fixed consideration was agreed appears to be flimsy and non-commercial in practice.
In early November, Regal Funds in conjunction with global private equity firm, EQT, recognising the enormous latent value embedded within PPT's corporate trust business; disclosed a competing, superior albeit non-binding offer of $30 a share.
This offer was rejected along with a revised offer of $33 a share. In addition, PPT disclosed that other competing proposals have been received.
We urge the board of Perpetual to fulfill their fiduciary and statutory duties to it's shareholders. It is evident that the proposed PPT/PDL transaction is deeply detrimental to PPT shareholders relative to the alternative proposals put forth by Regal and others.
Indeed, it was speculated as recently as July, that PPT had received an approach worth a potential $1.3 billion for its corporate trust business - with the company consequently confirming two separate unsolicited approaches for this business.
This is highly material given that prior to Regal's proposal, PPT's market capitalisation had dropped to a mere $1.4 billion.
The proposed PPT/PDL merger will destroy the embedded, latent value within the existing PPT business and we urge the board to consider and disclose further alternative proposals to the broader market.
Whilst a break fee of $23 million may be applicable in the case of the PPT/PDL transaction not proceeding; it is a small price to pay relative to the potential value destruction from pursuing a non-commercial agreement for Perpetual shareholders.
Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in Perpetual Limited (PPT).