Potential Buyout – 20% Questionable Upside
I have already covered PAC’s pending sale setup as Ideas Elsewhere and the whole investment pitch was laid out by Acid Investments at the end of July. But then this week, the tweet below prompted me to revisit the situation. While the setup is intriguing, there are several uncertainties that are keeping me on the sidelines.
PAC is an Australian asset management group with minority stakes in small and fast-growing boutique managers focused on a variety of private and public market strategies. While most of the investee companies are privately owned, PAC’s largest asset is a 4% stake in listed GQG Partners, an equity-focused asset manager with A$4bn capitalization. GQG stake is currently worth around A$157m or 33% of PAC’s market cap.
For the last 3 months, the company has been undertaking a potential sale process with several bidders reportedly lined up. Here is a quick recap of the recent developments:
- In July, PAC received a non-binding $11.12 cash+stock offer from its major shareholders Regal Funds (12% stake) and River Capital (19% stake). The company formed an independent committee to evaluate the proposal.
- Just a day later, GQG, one of PAC’s investee companies, announced intentions to put forward “a compelling proposal” to counter Regal’s offer. There has been no further news regarding GQG’s offer since, but discussions with the company are likely to be ongoing. This looked like the start of a bidding war that has never materialized.
- At the end of August, PAC released annual results and noted that it expects to make further announcements regarding sale during September. The results themselves were rather positive showing 9% YoY growth in ownership-adjusted FUM, +13% increase in management fee-related revenue, and better than expected gross new fund commitments to PAC’s portfolio companies. The release also included managing director’s overview with the same ‘farewell’ words as in the tweet above, namely:
The fact that the acquisition prices being discussed are notably higher than the pre-offer trading price suggests our intuition about PAC’s value may be right. Ultimately, our job is to deliver value to our shareholders. It now appears possible that delivering this value will be best achieved by selling the company.
As PAC potentially moves into uncharted territory, I want to say thank you for your insights, critiques, and encouragement. It has all contributed to making us a better company, for which we are deeply grateful. I am also exceptionally appreciative of the PAC board and employees, whose invaluable contributions to the company have positioned PAC to deliver considerable value to its shareholders, regardless of our future ownership structure.
- In mid-September, GQG’s CEO gave an interview blatantly praising how great PAC acquisition would be. It was a pretty strong language for an advanced stage sale process, especially, considering substantial cross-management and ownership dynamics – CEOs of both companies co-founded one of PAC’s predecessors, also, PAC’s CEO together with another director is on GQG’s board. From the interview:
Once in a while an M&A opportunity comes around – and one compelling enough to overcome the usual pitfalls associated with funds management deals, which often end badly for acquirers. We put PAC in that bucket. […] We know it extremely well, it is highly diversifying, it can be run independently – all the pitfalls of M&A, I think, we would be avoiding with this one.
- At the end of September, Regal Funds withdrew its bid, emphasizing that the decision was made solely due to a lack of engagement from PAC’s board and that it remains excited about PAC’s future prospects.
- According to this AFR article, there are several parties in the final discussion stages and binding bids are due by the end of October.
- Just last week, on the 11th of October, PAC published its annual report that contained the exact same overview from the managing director as at the time of the annual result release two months earlier, including farewell-sounding language on discussions to sell the company at higher than the pre-offer trading prices. One would assume, that if something had changed materially during the last two months, this overview would have been updated.
What price could be expected if the sale happens? Although PAC shares have always traded at a substantial discount to statutory NAV and management’s adjusted fair value estimate, the fair value NAV is likely to be a reasonable estimate in a takeover scenario. The recently withdrawn A$11.12 offer from Regal came at a small discount to Jun’23 NAV of A$11.92/share. Back in 2019 the company rejected another A$7.425/share takeover offer, which at the time was at a 7.5% discount to fair value NAV. Management has also noted a few times that in a sale scenario, the assets are likely to be worth more than the assessed fair value. From the annual presentation:
Reasonable likelihood of announcing one or more liquidity events in portfolio in FY24. Any portfolio realisations are likely to occur at valuations that exceed PAC’s fair value estimates.
So what we have here: 1) a target company, which seemingly really wants to be sold; 2) a sale process with multiple suitors approaching the finale; 3) one of the potential bidders throwing massive “we’re going for it” signs, while previously noting it’s ready to pay up in a bidding war; 4) share price materially below the levels of previous bids and management’s fair value estimate; and 5) a seemingly imminent announcement as binding bids are reportedly due at the end of this month.
So that’s the bullish pitch. However, I am far less excited about this setup than might appear from the outline above and there are a couple of issues that keep bugging me.
The key question is why did Regal walk away? Regal’s withdrawal statement notes that it re-affirmed the offer in September, yet after months of due diligence (which it claims was only high level) it did not want to increase the price. The whole explanation of being disappointed with engagement from PAC’s board and also this statement “Based on the manner in which Regal’s Re-affirmed NBIO has been received, Regal has little confidence in the process being run” seem weird and contradictory to very positive communication from PAC regardless the sale process. It could always be interpreted that Regal was simply rebuffed by the board as PAC is more willing to sell itself to GQG (or to one of the other interested parties) and therefore did not engage in further discussions with Regal. And maybe that will turn out to be the correct way to look at the situation…
But then on top of Regal walking away, we also have this – PAC’s ex-chairman and major shareholder Michael Fitzpatrick seems to have recently sold out of his position in the company. He suddenly trimmed his stake below 5% just one week before Regal withdrew its proposal. And then the next day after the withdrawal, someone sold a large 4.2% block of PAC shares in a private transaction. While the ex-CEO might have not been privy to any ongoing discussions, he probably still has a better understanding of the likely sale value than me or the average market participant. At the time PAC reportedly had all indicative bids collected already and was getting ready to accept final offers in the coming weeks.
In the meantime, since the receipt of Regal’s offer at the end of July, public fund managers in Australia have sold off quite heavily with Regal down 32%, Perpetual down 23%, and GQG down 20%. Coupled with Regal walking away from the bidding, this might have a negative effect on the price the remaining interested parties are ready to make for PAC. Also, based on changes in peer share prices, the downside in a no-sale scenario might be closer to A$6/share rather than A$7.8/share pre-announcement prices.
Finally, the finishing line appears to get pushed out, which generally is not a very positive signal in such situations. In the annual conference call management told shareholders to expect updates on the sale process in September. No official updates have been made yet. On September 19, AFR reported that indicative bids have been collected and management expects binding bids in 4 weeks. Now reportedly the binding bids are expected by the end of the month. Either AFR’s reporting regarding management’s expectations is not accurate, or the sale discussions are hitting some unexpected roadblocks.
To sum up this long rambling, some kind of announcement seems to be imminent, but even if the company gets sold, there is a risk this will be done below and not above Regal’s offer of A$11.12/share.