Given that suitors have been circling Perpetual (ASX: PPT), the grand old lady of the ASX for a few years, it’s hardly surprising that KKR has made a play for some of its assets.
With the share price looking somewhat depressed, the private equity spin-off recently made an opportunistic bid for the 139-year-old funds management giant’s wealth management and corporate trust divisions.
However, the private equity giant’s ability to raise the $2.2 billion it has offered for Perpetual’s assets looks increasingly unlikely since the deal received a shock tax bill estimate in early December last year.
The Australian Taxation Office (ATO) expects the proposed transaction to result in a bill of between $493 million and $529 million — five times more than the forecast $106 million to $227 million amount.
While Perpetual’s share price fell around 10% on the back of this news, it has managed to recover most of that lost ground.
Shareholders sour on deal
As a result of the ATO ruling, cash proceeds for shareholders from the sale of the wealth management and corporate trusts are expected to be ($6.08) over 30% lower than the previous mid-point of $9.10.
In light of this bombshell tax liability, shareholder appetite for the deal has clearly soured.
With KKR looking highly incapable of increasing its takeover bid, Perpetual’s partial demerger looks, for now, dead in the water.
Romano Sala Tenna portfolio manager at Katana Asset Management told Azzet that while KKR may come to the table with a sweetener, the longer it takes the less likely it is to eventuate.
The likelihood of the deal falling over has raised anxiety levels among brokers who expected the deal to help restore Perpetual’s balance sheet which is currently carrying around $600 million in debt.
Given the likelihood of independent experts not recommending the deal as in the best interest of shareholders, Citi expects Perpetual’s management to refocus the market’s attention on a strategic cost savings program.
Meantime, during its last update, Perpetual claimed it had funds under management (FUM) of $222.3 billion at 30 September, compared with $215 billion in June.
Great business but ‘poor leadership’
That’s good news for investors, and with the stock trading at a major discount to its peer group, Chris Kourtis, Ellerston Capital recently singled out Perpetual as the cheapest listed asset manager of scale in the universe.
Commenting on Perpetual at last November’s Sohn Hearts & Minds Investment Leaders Conference in Sydney, Kourtis said that the fund manager was suffering from a severe case of shareholder wealth destruction.
“The problem has been very poor leadership at the very top, poor capital allocation and woeful execution,” said Kourtis.
He also noted, Perpetual shareholders were “feeling a little bit like the mayor of Hiroshima from ’45.” Shares have halved in the past four years.
Most shareholders share Kourtis’ sentiments, with 88% rejecting the fund manager’s executive pay scheme and former Rothschild banker David Kingston describing the board’s actions as “empire-building going badly wrong”.
However, despite being poorly run, Sala Tenna reminds investors that Perpetual still has three strong underlying businesses.
“We’ve been buying back in on the view that it's fundamentally cheap but to see the upside we do need to see a suitor and we believe this is still a possibility,” Sala Tenna told Azzet today.
“We would expect to see a notable P:E expansion if they held onto these assets and then rationalised them at a later date.”
Perpetual has a market cap of $2.5 billion, which puts it well inside the ASX200; the share price is down around 16% over one year. At the time of writing, Perpetual's share price was $21.75.
Consensus on the stock is Moderate Buy.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
