Quick Pitch: Perpetual (PPT:AX)

Potential Higher Offer / Bidding War

Perpetual is an Australia-listed company that provides asset management, wealth management, and corporate trust services. PPT has recently received a takeover bid from its largest shareholder, the investment house Washington H. Soul Pattison and Company (SOL:AX, owns 12%), at an implied value of A$27/share vs the current price of A$25.5. The offer was rejected and PPT launched a strategic review instead. Subsequently, SOL raised its stake in PPT, hinting that the bid increase might be in the cards. Recent media reports suggest that other large asset managers are also interested in PPT. The company is now in play and I think there is a pretty high likelihood of a bidding war. There seems to be sufficient headroom for an improved offer. Even if the buyout fails to materialize, the downside to pre-announcement levels appears to be minimal.

Here’s a brief timeline recapping the recent developments:

  • November 21 – SOL made a non-binding proposal to acquire PPT. The offer was kept private and not disclosed to the public at the time.
  • December 5 – PPT launched a strategic review intended to explore “the separation of its Corporate Trust and Wealth Management businesses and creating a more focused Asset Management business”. As it turned out a day later, the exact same business split was also part of Sol’s bid. Seems like management announced this strategic review preemptively, knowing that SOL’s offer would be soon disclosed to the market.
  • December 6 – SOL welcomed PPT’s strategic review and disclosed the previously made acquisition offer to the public. The bid was structured in a way where the Asset Management business would be demerged and subsequently distributed to existing PPT equity holders (implied valuation of A$2bn or A$17.65/share) and SOL would retain PPT’s Wealth Management and Corporate Trust segments in exchange for the buyer’s stock (valued at A$1.06bn or A$9.35/share). SOL would also assume all group net debt and stranded group costs. The equity part sums up to A$27/share, but the first portion of the offer, i.e. value of the to-be-demerged Asset Management business, is questionable as it is not clear at what price this standalone business would trade in the market.
  • December 6 – A couple of hours later, PPT’s management rejected SOL’s offer as undervaluing the company after “confidential discussions” with the bidder.
  • December 12 – SOL increased its ownership stake in PPT from 10% (as of November 13) to 12%. SOL acquired new shares around the current prices at c. A$25/share. The shareholder also owns incremental cash-settled equity swaps, bringing SOL’s total economic interest to 15%.

Recent media reports indicate that a number of asset managers/PE firms, including KKR, Pacific Equity Partners, EQT, and Partners Group, have entered the race to acquire PPT.

PPT1 1

Over the last 1.5 years there have also been a couple of other offers:

  • In Jul’22, media reported that PPT had received an acquisition bid for the Corporate Trust business from Partners Group at A$1.3bn. Shortly after, PPT’s management confirmed that it had received two non-binding offers for the segment. PPT stated that the offers were “highly conditional” and the company was not looking to divest the segment.
  • In Nov’22, a buyer consortium comprised of Regal Partners and BPEA EQT made a takeover bid for the entire company at A$30/share. The offer was rejected by PPT’s management as materially undervaluing and conditional on PPT terminating the then-pending acquisition of Pendal Group. The buyer consortium later revised the bid upwards to A$33/share (A$1.9bn), but it was also rejected. Since then, PPT closed the acquisition of Pendal Group (part of the Asset Management business) and almost doubled its share count in the process. Thus the previous A$33/share offer might not be directly comparable to today’s price. However, Pendal was acquired at c. A$2bn in cash and stock (most likely PPT materially overpaid) and at least part of this purchase cost should come on top of the A$1.9bn offered for the pre-Pendal PPT.

So what we have here is a company that’s in play with several interested parties and a couple of previous offers that could act as price reference points. The downside to pre-announcement prices is only 10%. That’s the gist of the setup. What follows, is a bit of background on PPT’s business and my quick attempt at a valuation of different parts of the company.

 

Business segments

Perpetual has three business lines:

  • The Asset Management business comprises seven asset management boutiques/brands owned by the company. Revenues are mostly generated from fixed management fees (around 40bps) and are driven by increases/decreases in AUM. Total AUM stands at A$212bn.
  • Wealth Management includes estate/tax/retirement planning and life insurance services (non-market-related revenues), as well as asset management services (market-related revenues). Revenues come from fixed fees paid by clients, commissions, insurance premiums, and performance/management fees. Two-thirds of revenues are market-related.
  • Corporate Trust provides trustee, agency, escrow, custody, responsible entity, and other services. Revenues are mostly generated from service, transaction, custody, and other fees.

PPT3

PPT5

Wealth Management and Corporate Trust segments have displayed consistent/growing topline and EBITDA over recent years. PPT’s stock price decline appears to have been driven primarily by the underperformance of the Asset Management business. Segment’s revenue margins (revenues as a percentage of AUM) have decreased materially due to several lower-revenue margin acquisitions, including Trillium and Barrow Hanley (both completed in 2020). The A$2bn+ cash and stock acquisition of Pendal Group this year resulted in significant dilution to shareholders without the equivalent increase in the group’s profitability. On top of that, Pendal’s business has suffered substantial asset outflows since the merger announcement. Management still expects to realize A$80m in annualized synergies from the acquisition by Jan’25 (compared to A$188 in Asset Management’s TTM pro-forma profit before taxes).

PPT4 2

 

How much could these businesses be worth?

Wealth Management + Corporate Trust:

  • These businesses did a combined A$130m in profits before tax during FY23 and continue to grow. Adjusting for the group’s interest payments, the combined profitability stood at c. A$100m.
  • SOL is bidding A$1.06bn for these segments or A$1.9bn adjusted for the assumed group liabilities.
  • A year ago Partner Group wanted to pay A$1.3bn just for the Corporate Trust segment (c. 2/3 of the profits). At this level and on a proportional profitability basis, both segments together would be valued at c. A$2bn.
  • Publicly-listed Australian peer EQT:AX – provides trustee and estate planning/asset management services – is currently trading at c. 23x FY23 pre-tax earnings. The competitor is smaller than PPT’s Wealth Management and Corporate Trust businesses (A$141m in TTM revenues vs A$395m for PPT’s CT and WM).
  • Relative to these reference points, SOL’s bid at 10x pre-tax earnings for Wealth Management + Corporate Trust seems a tad too low. In a competitive bidding process, these businesses could probably fetch 20x pre-tax (but post-interest expense) earnings multiple. This would also tie in with Partner Group bid a year ago.

Asset Management:

  • Pro-forma for the full year of Pendal’s results, Asset Management business did A$190m in profits before tax, with the expectation of further A$80m of synergies by Jan’25.
  • Without attributing any value to these synergies, SOL’s offer implies the demerged Asset Management business would trade at c. 11x pre-tax earnings.
  • Australian-listed peers MFG, GQG, IFL, and PTM currently sit at significantly lower multiples of 6.4x, 13.9x, 7.0x, and 6.4x TTM pre-tax earnings respectively. In light of these lower valuations, the A$2bn fair value tag for PPT’s Asset Management business seems a bit too high.
  • However, historical industry transactions during 2016-2021 were typically done at somewhat higher 10x-18x forward P/E multiples (see table below).

PPT2

So the bid for Wealth Management+Corporate Trust seems too low, while SOL’s estimate of where Asset Management business could trade appears fair / too high. However, taken in aggregate, there seems to be sufficient headroom for improved offers either from SOL or from the other parties.

 

Washington H. Soul Pattison and Company (SOL)

SOL is A$12bn market cap ASX-listed diversified investment company with holdings across several different industries, including building materials, telecommunications, corporate advisory, and retail, among others. SOL currently boasts A$0.9bn in cash available for investments. During the recent conference call, SOL’s management emphasized that it has been PPT’s shareholder “for many years” and hinted that PPT is significantly undervalued at the current share price levels:

We’re obviously limited in what we can say about this proposal, outside of what has already been disclosed in our announcement on Wednesday afternoon. But to give you a little bit of history, Soul Patts has been a shareholder in Perpetual for many years. And recently, we saw an opportunity to increase our position during a period of particular weakness in the share price. We had a view that the sum of the parts was worth more than the market capitalization. Not only did we accumulate a significant interest, up to 9.9%, we turned our minds to whether there was a value-enhancing opportunity that we could provide to the company.

12 Comments

12 thoughts on “Quick Pitch: Perpetual (PPT:AX)”

  1. Thanks for the pitch DT.

    As a read through this I am trying to work out the incentives at play as I have no knowledge of how to value the businesses at hand.

    Given the board has rejected several offers in the past, what makes you believe they will accept an offer this time around? What are their obligations with regard to informing shareholders of the receipt of a non-binding offer? It seems as though they have the right to reject offers without first informing shareholders.

    Could the board be conducting a strategic review simply to appease shareholders by giving the outward appearance that they are seeking to maximize shareholder value when they may well just reject any potential offer and maintain the status quo?

    What is the market value if the units/shares that the executive management and board own relative to their salaries?

    With regard to the following:

    “In Nov’22, a buyer consortium comprised of Regal Partners and BPEA EQT made a takeover bid for the entire company at A$30/share. The offer was rejected by PPT’s management as materially undervaluing and conditional on PPT terminating the then-pending acquisition of Pendal Group. The buyer consortium later revised the bid upwards to A$33/share (A$1.9bn), but it was also rejected. Since then, PPT closed the acquisition of Pendal Group (part of the Asset Management business) and almost doubled its share count in the process. Thus the previous A$33/share offer might not be directly comparable to today’s price. However, Pendal was acquired at c. A$2bn in cash and stock (most likely PPT materially overpaid) and at least part of this purchase cost should come on top of the A$1.9bn offered for the pre-Pendal PPT.”

    If I understand this correctly, they called shares “materially undervalued”, and proceeded to use those “undervalued” shares to make an acquisition. Now, unless they were acquiring a firm that was even more undervalued this action seems fundamentally contradictory and quite concerning to me.

    Basically, my concern is the board has not, and will not act in the best interests of shareholders despite current outward appearances. Have a misunderstood the prior events and the current thesis, are my concerns disproportionate to the probable outcomes perhaps, or do you share the same concerns?

    Thanks

    Reply
    • You are correct to point out that shareholders should not rely just on PPT’s management to maximize shareholder value and their track record is not great, especially with the value-destroying acquisition of Pendal. Management’s stock ownership is negligible compared to compensation (and actually below the company’s own ‘minimum share-holding guideline). The value of stock owned by executives sums up to A$4m, whereas their 2023 annual compensation stood A$13m.

      However:

      – Management announced a strategic review only after receiving the offer from SOL and before disclosing that offer to the public – I take it as a sign that they feel pressured by SOL and understand that some kind of steps must be taken.
      – On top of that, the announced strategic review is rather specific in terms of business separation and mimics the acquisition proposal outlined by SOL, I do not think that is a coincidence. Looks like management understands that SOL’s proposal makes sense and wants to see if there might be any other interested parties.
      – SOL doubled equity ownership by acquiring new shares in the company after the announcement of strategic review.

      So this is not just a bet on management finding a way to maximize shareholder value. But even if that fails, the downside to pre-announcement prices looks limited (around 10%).

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  2. Interesting situation, but in case of no-deal one needs to be comfortable with owning an asset manager that is experiencing outflows. Any insight on the gross outflow rate experienced by the Asset Management business? (like most asset managers, they report inflows/outflows on a net basis – I haven’t seen the gross redemption figures)

    Reply
    • I agree – the valuation of the asset management business (either stand-alone or in an acquisition) is a significant risk factor for this setup.

      I was not able to find gross outflow figures either – the company does not seem to report those. However, out of the A$8bn of net outflows during fiscal 2023, $5bn came from the freshly acquired Pendal business and might have been driven purely by takeover/integration rather any negative secular trends with Perpetual’s asset management business. Also, A$8bn of net outflows only amounts to 5% of AUM, so it is not like clients are running away from Perpetual en masse.

      Reply
  3. Business update released with no major surprises. The strategic review is still ongoing. Recent AFR article suggests multiple parties are interested in PPT’s units. PPT said it would update investors with half year results (due February 28). Stock continues to trade around write-up prices with 6% spread to the previously rejected buyout bid from SOL.

    “Street Talk can reveal TA Associates, which dominates financial services deals in the region, has hired Morgan Stanley and is preparing to lob a first-round offer for Perpetual’s wealth unit by Friday’s deadline. Meanwhile, EQT’s Barrenjoey-advised private equity team is coming in hot for Perpetual’s Corporate Trust unit, only months after blowing the competition out of the water with its VetPartners acquisition.”

    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02766105-2A1501480

    https://1ft.io/proxy?q=https%3A%2F%2Fwww.afr.com%2Fstreet-talk%2Fregional-pe-titans-prepare-offers-for-perpetual-units-20240130-p5f16k

    Reply
    • I would not call these quarterly results as being ‘with no major surprises’. During the quarter PPT saw net outflows of $A4.3bn. In the write-up have discounted the previous large net outflows to Pendal’s acquisition. These seem to be happening again – this time management explains large net-outflows by the ‘difficult period for active asset managers globally’ rather than any company-specific issues. However, with every net-outflow the value of the PPT franchise is reduced.

      On the positive side, AFR article linked by Lukas has an interesting tidbit, suggesting that the company is actively working towards sale of both segments:
      “Perpetual has Bank of America (wealth), Goldman Sachs (corporate trust) and Luminis Partners (all-of-company) in its corner. Sources said two data rooms are being run consecutively – one for the corporate trust business and one for wealth.”

      Reply
  4. PPT is down a bit over the last few days after the release of fiscal H1’24 earnings (ending December). The large net outflows figure was already known from the business update at the end of January. However, according to AFR, the market was disappointed with H1 results due to a lackluster update on the strategic review and a bit worse than expected performance in the asset management and corporate trust segments.

    Corporate Trust’s underlying PBT was down 2% YoY and wealth management UPBT was up 18%. Asset Management segment reported underlying PBT of A$95.8m, down 1% on a sequential basis (vs. fiscal H2’23). Very little was said on the ongoing strategic review.

    Last month, AFR also reported that PPT had lined up multiple credible bidders including KKR, TA Associates and EQT. However, the rumors were that the sale process is rushed and might fail to unlock value. Nonetheless, demerger of the Wealth and Corporate Trust segments from the Asset Management could also be a positive alternative.

    https://www.afr.com/chanticleer/once-great-perpetual-bet-the-farm-and-isn-t-winning-20240228-p5f8g0

    https://www.afr.com/companies/financial-services/perpetual-frustrates-analysts-with-demerger-non-update-20240227-p5f8ar

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  5. According to AFR’s Street Talk, preliminary bids for Perpetual were collected last week. It seems like the full company sale is not even on the table now as the bids have been reported to come only for PPT’s Wealth Management and Corporate Trust segments, omitting it’s largest business – Asset Management. KKR and Permira, previously mentioned bidders, are targeting both the wealth and corporate trust units, while TA Associates and EQT Partners each seek to acquire only one segment respectively.

    Meanwhile, PE firm SOL:AX, which made the initial A$27/share offer for PPT in December and then acquired a 15% stake, is now staying on the sidelines. PPT trades just below A$25/share.

    https://www.afr.com/street-talk/round-two-underway-for-perpetual-breakup-bids-land-20240325-p5ff0a

    Reply
  6. PPT’s strategic review is in its final stages. Management confirmed that a detailed update will be provided by May 8.

    According to the latest rumors, there have been some shifts in the lineup of potential bidders. TA Associates and EQT have formed a consortium and plan to submit a joint bid for PPT’s Wealth Management and Corporate Trust units. Permira has withdrawn the interest after submitting a non-binding proposal for the same units. KKR remains actively involved in the process and also targets the same two units. As I understand, PPT’s Asset Management hasn’t received any interest so far. The previous bidder SOL, which made the quickly rejected A$27/share offer in December still holds a 15% stake. AFR noted that SOL refused to participate in the bidding process after being asked to sign a standstill agreement. PPT currently trades at A$23/share.

    From the operational standpoint, the entire asset/wealth management sector, including PPT, continues to face challenges. According to PPT’s brief Q3 update, the Asset Management business continues to experience significant net outflows, totaling $5.2bn for the quarter. Despite this, AUM grew by 6%, mostly due to favorable market and FX movements. Growth in the Corporate Trust business was flat in Q3. Wealth Management grew FUA by 5%, again due to positive market movements, while net flows remained flat.

    https://www.afr.com/street-talk/perpetual-turns-into-two-horse-race-as-bidders-team-up-20240407-p5fhzh

    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02798684-2A1519163

    Reply
    • The reported rumors from AFR appear to have been spot-on. PPT just confirmed they’re in exclusive talks with KKR regarding the acquisition of their Corporate Trust and Wealth Management businesses. The specifics of the potential deal remain unclear as negotiations are ongoing. The exclusivity period expires on May 7th, just ahead of PPT’s completion of the strategic review and a planned update on May 8.
      https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02802515-2A1520781

      Reply
      • Update on strategic review is out confirming the offer from KKR. The market seems to not like it and the sp is down 7%. Offer seems to be in line with the afr article. Any thoughts?

  7. PPT just announced the results of the strategic review. The stock is down by 7%, but I think, market’s negative reaction is overblown.

    KKR will buy Corporate Trust and Wealth Management businesses for about A$2.18 billion in gross proceeds. The cash will be used to repay the debt and pay the capital gains tax. It is not clear how large the tax bill will be. The exact net cash proceeds to be expected from this transaction would only be announced in August.

    In the meantime, the deal values the WM and CT business at around 16x LMT EBIT, which is a bit too light. I was expecting something closer to 20x, where the peer EQT currently trades. But nevertheless this seems like to reasonable outcome which is above the previous A$1.9bn bid for these segments by SOL.

    What is the value of the remaining Asset Management business after covering debt and taxes from the sale proceeds? Assuming 30% capital gains tax on all of gross sale proceeds (i.e. A$660m in taxes, I think that would be the worst case scenario) and A$700m of debt repayment, would leave A$880m in excess cash. This is more than third of the market cap.

    In turn, pro-forma for the sale, the market currently values PPT’s Asset Management business at A$1.6bn on TTM EBIT of A$190m, which equates to an 8.5x multiple.

    I am tempted to wait for further disclosures regarding the net proceeds from this transaction. SOL is still a large shareholder of PPT (owns 12%) with a cost basis above A$25/share vs PPT’s current price of A$22.32/share. The implied valuation of the previously-rejected SOL’s offer was A$27/share, so I doubt SOL would approve this sale to KKR unless it actually offers better terms than its own offer in December.

    Deal presentation: https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02804763-2A1522235

    Deal announcement: https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02804762-2A1522234

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