Sometimes you can fall on your feet by pure luck. I’d say that sums up my experience in owning Perpetual shares. In early September 2022, I decided it was “Time to Jump Ship” on Magellan Financial Group (MFG) which had just paid a dividend and was trading at around $12.40 per share. My logic was to jump aboard Perpetual which was within days of going ex-dividend and was trading at close to $27 per share. At that time analysts were forecasting MFGs FUM to continue its slide while PPTs earnings were forecast to grow. So I sold out of MFG (at a considerable loss) and invested the remaining proceeds into PPT instead.

The Pendal acquisition proposal was under consideration when Regal (Phil King) teamed up with Swedish private equity firm BPEA-EQT for a non-binding $33 per share offer for Perpetual, on the condition it walk away from the proposed Pendal merger. 

Perpetual knocked back the bid, but the NSW Supreme Court dealt efforts to elicit a higher price from the consortium a blow by confirming penalties Perpetual may face if it backed out of the merger, which has been in the works since April (AFR, 18th November 2022).

For a very brief window PPTs shares were trading at over $33 per share which I used as an opportunity to exit PPT . It wasn’t long before the market realised there would be no higher bids from Regal for PPT and clauses in the PPT PDL merger proposal prevented PPT from withdrawing without significant penalties and legal repercussions. Pure Luck!

I also held some loss making Pendal shares at the time which were eventually merged in exchange for PPT shares. I’ve been sitting on these additional PPT waiting looking for an opportunity to cash out. SOL Patt’s proposal to acquire PPT in exchange for WHSP and PAM script might provide that opportunity. The proposal is non-binding and may fall through, However in the meantime , I will be watching to see how close the PPT share price comes to $27 (the indicative value of PPT shares under the SOL proposal) with my finger hovering over the sell button!

Disc: Held IRL (1%)

Non-binding indicative proposal to acquire Perpetual

Diversified investment house, Washington H. Soul Pattinson and Company Limited (ASX:SOL or “WHSP”), announces that on 21 November 2023, it submitted a non-binding, indicative offer to acquire 100% of the issued ordinary shares of Perpetual Limited (“Perpetual”) not already owned by WHSP via a scheme of arrangement (the “Indicative Proposal”).

WHSP notes the announcement from Perpetual today 6 December 2023 that it intends to explore a potential separation of its Corporate Trust and Wealth Management businesses from its Asset Management business. As a large shareholder WHSP welcomes this step and is committed to constructively engaging with Perpetual’s Board and other shareholders to further progress the Indicative Proposal which it strongly believes is in the best interests of all shareholders.

Overview of Indicative Proposal Under the Indicative Proposal, WHSP would acquire 100% of the shares in Perpetual by way of a Scheme of Arrangement and undertake a simultaneous demerger of Perpetual Asset Management (“PAM”), distributed in-specie to existing Perpetual shareholders. WHSP would retain 100% of the Perpetual Wealth Management (“WM”) and Perpetual Corporate Trust (“PCT”) businesses in exchange for WHSP shares, as well as assume responsibility for all group net debt and stranded group costs.

WHSP believes the Indicative Proposal provides a unique opportunity for Perpetual shareholders to unlock value in a tax efficient structure while retaining exposure to each of Perpetual’s three businesses.

The Indicative Proposal implies equity value of $3,060m, comprising:

• WHSP scrip worth $1,060m1; and

• PAM scrip worth an estimated $2,000m.

This represents a value of $27.00 per Perpetual Share (“Offer Consideration”) and total enterprise value of $3,531m. The Offer Consideration is at a meaningful premium to the undisturbed market prices for Perpetual shares, representing:

• 28.6% premium to the undisturbed closing share price of $21.00 on 13 November 20232;

• 33.4% premium to the undisturbed 1-month VWAP of $20.24 as at 13 November 2023; and

• 28.3% premium to the undisturbed 3-month VWAP of $21.04 as at 13 November 2023.

After adjusting for the liabilities that WHSP will assume, and excluding the value of PAM, the implied value for WM and PCT is $1,885m. Indicatively, this represents a 56.4% premium to $1,205m, the value of WM

1 The value of $1,060m is fixed, i.e. the exact number of shares to be issued will be determined based on the SOL share price at the time of the transaction.

2 13 November 2023 was the last undisturbed share price before WHSP’s 9.99% economic interest in Perpetual was disclosed.

and PCT implied by Perpetual’s current market capitalisation after adjusting for the aforementioned liabilities, and excluding PAM, as at 13 November 2023.

The Indicative Proposal provides a mechanism for all Perpetual shareholders to realise a premium value for WM and PCT, while retaining exposure to a separately listed PAM. A singular management focus on PAM positions the business to deliver growth in the global asset management sector, and to benefit from annualised synergies of the Pendal integration without the burden of leverage.

In WHSP , Perpetual shareholders will not only continue to benefit from WM and PCT’s annuity-style earnings streams, but also gain exposure to a broader, more liquid stock backed by a diversified portfolio of quality assets, a net cash position, and a focus on wealth creation for retail shareholders.

Strategic rationale

As a diversified investment company with a proud Australian heritage and a proven track record of delivering shareholder returns, WHSP is uniquely positioned to partner with Perpetual to deliver value for all of its shareholders. WHSP has been a long term shareholder of Perpetual and, as disclosed on 13 November 2023, currently holds interests (comprising a relevant interest and an economic interest) of up to 9.9% over the ordinary shares in Perpetual.

As a long-term investor in Perpetual, WHSP has a deep understanding of Perpetual and its individual business segments, which each have different characteristics and mostly operate independently. WHSP believes the complexity of the Perpetual Group, together with the current market backdrop and

Perpetual’s high financial leverage, is weighing on the share price and constraining Perpetual’s strategic flexibility.

The acquisition would provide further diversification to WHSP’s portfolio and increase exposure to financial services. The Indicative Proposal demonstrates WHSP’s ability to unlock value through a creative, flexible and long-term approach.

Additional information

The Indicative Proposal is subject to satisfactory completion of confirmatory due diligence by WHSP , the execution of transaction documentation and a unanimous recommendation from the Perpetual Board that shareholders vote in favour of the Indicative Proposal, as well as other customary conditions.

WHSP has appointed Macquarie Capital as its financial adviser and Ashurst as its legal adviser. WHSP is committed to engaging with Perpetual’s Board and other shareholders to further progress the Indicative Proposal which it strongly believes is in the best interests of all shareholders.

-ENDS-

The Baby Boomer Boost is about to spike for fund managers in 2026, and will remain strong until 2029. After that the number of retirees will drop off quite rapidly until 2040.

Source: https://www.firstlinks.com.au/turning-point-2020s-baby-boom-retirement-surge

Adding to this boost is the declining number of new Self Managed Super Funds accounts. The interest in managing your own fund is waning, dropping by half over the past 10 years. Some of these funds are being directed to fund managers.

Source: https://www.afr.com/wealth/personal-finance/new-smsf-accounts-plunge-as-big-super-fights-back-20230209-p5cjbg

The Baby Boomer Boost should be a nice tailwind for fund managers who are performing well up until 2029. Then it might be a good time to sell fund managers?

Disc: Held IRL

It’s getting interesting. Increasing bids are coming in for Perpetual, latest $33 from the Consortium. Perpetual is asking for more time to consider the Pendal acquisition bid. However, Pendal is now losing patience and is proceeding to the first court hearing aiming to speed up the dispatch of the Scheme booklet to shareholders, aiming to keep Perpetual on track for the Scheme meeting scheduled for mid-December. This is creating a lot of confusion for both Perpetual and Pendal shareholders. Anything could happen from here, including nothing at all.

Disc: PPT & PDL held IRL

Scheme of Arrangement – Transaction Update

Sydney, Australia, 10 November 2022 – Pendal Group Limited (Pendal)(ASX: PDL) refers to the proposed acquisition of Pendal by Perpetual Limited (Perpetual) (ASX: PPT) by way of a Scheme of Arrangement (Scheme) that was announced on 25 August 2022 when the parties entered into a Scheme Implementation Deed.

On 3 November 2022, Perpetual announced that it received and rejected an offer by BPEA Private Equity Fund VIII’s indirect wholly owned subsidiary Morello Pte. Limited and Regal Partners Limited (Consortium) to acquire 100% of Perpetual. Since that time there has been media speculation about further approaches from the Consortium and other parties seeking alternative transactions with Perpetual, and Perpetual itself has informed Pendal to that effect.

Pendal wishes to update its shareholders and the market that despite requests by Perpetual for a delay, it intends to proceed to the first court hearing for the Scheme this week and to seek orders convening the scheme meeting and for despatch of the Scheme Booklet to shareholders, with a scheme meeting to occur in mid-December 2022.

Pendal notes that while the Scheme Implementation Deed permits Perpetual to engage with another proposal, it does not permit Perpetual to terminate or otherwise abandon the Scheme in order to pursue a proposal. For clarity, the Deed does not preclude Perpetual responding to a proposal, but any resulting transaction can only be implemented in circumstances where the Scheme is accommodated. Any speculation to the contrary is inaccurate and contrary to a certain and well-functioning market for corporate control.

The consortium comprising BPEA Private Equity Fund VIII and Regal Partners Limited has upped its offer from $30 to $33. Perpetual still thinks it’s undervalued and rejects the offer. A bird in the hand?…I’ll be selling some more today.

Disc: Held IRL

Perpetual rejects revised conditional, non-binding indicative proposal

Following our announcement on 3 November 2022, Perpetual Limited (Perpetual) (ASX:PPT) confirms that it has received a further unsolicited conditional, non-binding indicative proposal (the Revised Indicative Proposal) to acquire 100% of the shares on issue in Perpetual from the consortium comprising BPEA Private Equity Fund VIII and Regal Partners Limited (the Consortium).

Under the Revised Indicative Proposal, the Consortium is offering $33.00 cash per share1, an increase from the original Indicative Proposal of $30.00 cash per share1. It continues to materially undervalue the company.

Perpetual’s Board has considered a number of factors, including value, high conditionality, transaction and execution risks, in determining that the Consortium’s Revised Indicative Proposal is not in the best interests of its shareholders and has therefore rejected the offer.

Perpetual’s Board advises shareholders to take no action at this time. Perpetual will keep shareholders informed in accordance with its continuous disclosure obligations.

-ENDS-

To be honest I don’t really know what is going on with Perpetual’s share price this week, up 10% since Tuesday in a lack lustre market (at the time of writing). Does anyone know what is going on?

What I do know is that over the past 7 weeks there have been some big bets out against Perpetual with short positions rocketing from 1.6% to 8.8%.

https://www.shortman.com.au/stock?q=PPT

The sudden boost in short positions coincided with the Pendal acquisition announcement. Some fund managers hated the proposal and started betting against Perpetual in a big way.

Oddly enough the views on the Pendal acquisition between fund managers are polar opposites.

On the 30th James Mickleboro from The Motley Fool shared a note from Bell Potter:

“The team at Bell Potter are positive on the fund manager and believe its shares could bounce back very strongly.

According to a note, the broker has retained its buy rating and lifted its price target on the company’s shares to $39.80.

Based on the current Perpetual share price of $27.25, this implies potential upside of 46% for investors over the next 12 months.

The broker is also forecasting a dividend yield of approximately 7.5% in FY 2023, stretching the total potential return beyond 50%.

We believe the agreed acquisition of PDL is good news and should create a strong company with a wide product set and global distribution opportunities, which should drive growth over the next few years.

In addition, excluding the Pendal acquisition, the broker sees significant value in the Perpetual share price. Particularly after recent weakness. It concluded:

We value Perpetual (excluding Pendal) using DCF valuation, with a WACC of 10.0% applied to EBITDA after tax. This gives a value for the business of $2.3bn or $39.78 per share (which we round to $39.80 as a target price). This is 3.6% higher than our previous valuation of $38.40 per share. The 9.4% fall in the share price on August 25 following the [Pendal] announcement seems at odds with the strong trading and benefits of the merger, and we would see this recent weakness as a buying opportunity.”

My best guess is that some fund managers holding short positions are getting cold feet, or changing their short thesis, and starting to buy back their short positions. This, along with the share price coming off a very low base, and a good week in the market for the financial stocks could be contributing to the sudden boost in the share price.

Whatever is going on, I think Perpetual is undervalued at current levels, and it pays a fat 8% fully franked dividend.

Disc: Held IRL (4%)

Like all fund managers, the Perpetual share price has been in a slide. I own shares in Pendal which has been approached twice by Perpetual within 12 months with a takeover bid. The first was rejected by Pendal as opportunistic, the second has been recommended by the board.

At first I was getting ready to sell Pendal expecting a big share price jump, however the market reaction to the takeover didn’t play out as I expected. Perpetual shareholders hated the idea and the PPT share price plummeted. Because it is a mostly script based offer, the Pendal share price didn’t move up as much as I expected either.

So then I started digging more into Perpetual. I was surprised at how well the business has been going. Revenue up 20%, underlying NPAT up 21%, NPAT up 39%, ROE up 44 bps to 16.2%(underlying) and the dividend up $2.09 fully franked which is a yield of 7.9% on yesterday’s close price (11.3% including the franking credits).

FUM has been strong also:

Perpetual is expecting strong demand and increasing FUM for FY23

The FY22 results were better than I expected to see given the long-term negative reaction from the market this year:

Source: Commsec

However, analysts are bullish on Perpetual’s future earnings growth. The average of 10 analysts forecasts has PPT earnings growing by nearly 12% annually over the next 3 years (S&P Global data provided by Simply Wall Street).

Bell Potter expects potential upside of 46%

James Mickleboro from The Motley Fool shared a note from Bell Potter:

“The team at Bell Potter are positive on the fund manager and believe its shares could bounce back very strongly.

According to a note, the broker has retained its buy rating and lifted its price target on the company’s shares to $39.80.

Based on the current Perpetual share price of $27.25, this implies potential upside of 46% for investors over the next 12 months.

The broker is also forecasting a dividend yield of approximately 7.5% in FY 2023, stretching the total potential return beyond 50%.

We believe the agreed acquisition of PDL is good news and should create a strong company with a wide product set and global distribution opportunities, which should drive growth over the next few years.

In addition, excluding the Pendal acquisition, the broker sees significant value in the Perpetual share price. Particularly after recent weakness. It concluded:

We value Perpetual (excluding Pendal) using DCF valuation, with a WACC of 10.0% applied to EBITDA after tax. This gives a value for the business of $2.3bn or $39.78 per share (which we round to $39.80 as a target price). This is 3.6% higher than our previous valuation of $38.40 per share. The 9.4% fall in the share price on August 25 following the [Pendal] announcement seems at odds with the strong trading and benefits of the merger, and we would see this recent weakness as a buying opportunity.”

My Valuation

Using McNivens StockVal Formula and the following variables, V = $35

APC = Forward ROE of 15%

E = $16.30 ( FY22 shareholder equity, Commsec)

RI = 5% of APC

RR = 10% (my Required Return)

D = 95% of APC plus franking credits

Disc: Held IRL