Analysts question viability of Perpetual’s KKR scheme
Perpetual has been questioned on whether its deal with KKR is best for shareholders and whether it can be undone given the lack of growth in the company’s share price.
Earlier this year, it was announced that Perpetual would sell its corporate trust and wealth management business to KKR, leaving behind the asset management division.
It has entered into a scheme of arrangement where KKR will buy its corporate trust and wealth management businesses for $2.1 billion. Perpetual will provide transitional services to KKR for 18 months post-completion, with the option to extend for a further 12 months, and after that date the corporate trust and wealth management businesses will operate as standalone, independent businesses.
But on a shareholder call regarding its FY24 results call, an analyst questioned whether there was a possibility that the deal could be undone.
Since the transaction was announced on 8 May, shares have fallen from $22.3 to $19.8, a decline of 11 per cent versus gains of 3 per cent by the ASX 200 over the same period. As well as this, the firm is paying $50 million in annual costs regarding the completion covered by a transitional services agreement for an initial 18-month period.
“What is the contingency planning if the scheme doesn’t get up? Since news of this transaction came up, the share price has come off quite a bit. Is there a point when the board or the new management would consider pulling the transaction, and how complicated would it be to untangle at this point?,” he asked.
A second analyst questioned the tax liabilities associated with the deal and if Perpetual was in discussion with the Australian Taxation Office.
Outgoing chief executive Rob Adams, who will be replaced by Bernard Reilly this month, said: “Our full focus is on delivering the transaction. We are working towards the upper end of the range, and we believe it represents the right outcome for shareholders, especially if the work is done to ensure our asset management is fit to stand alone. Our board is managing contingency plans. It’s not the outcome we expect, but we are managing them.”
He said, even in the unlikely event that the deal did not proceed, Perpetual still believed it was best to run its asset management, corporate trust and wealth management businesses separately.
“We had a realisation that the revenue and expense synergies of the three parts would be quite limited and we had already moved to have them operate independently even before the strategic decision with KKR.
“We didn’t see any benefit in having them all together and that would be the path we follow. Each of the three businesses are high-quality but, in the wrapper of Perpetual, we hadn’t felt the value had been unlocked to the extent that we feel sits within them.”
Flows trajectory
Meanwhile, he elaborated on flows momentum given it reported $18.4 billion in outflows during FY24. Outflows were concentrated in J O Hambro’s Global and International Select strategies, as well as its UK Dynamic strategy, following the departure of portfolio manager Alex Savvides.
It also experienced net outflows in TSW’s International equities capability, driven by partial redemptions from clients due to portfolio rebalancing and asset allocation shifts.
However, Adams is optimistic that flows are improving in the first quarter of 2024, particularly in the Australian intermediary and institutional channel.
“We’ve seen some positive momentum this quarter. In the fourth quarter [of FY24], what we did expect to happen didn’t, and what we didn’t expect did happen. We talked about some big institutional wins and none of those funded in the fourth quarter; some will fund this quarter and some in the following one, so that’s helping our momentum.
“We have definitely seen moderation in the outflows in the JO Hambro capabilities and we’re seeing some good interest in our international and global opportunities capabilities and in some of the emerging market and positive flows for the UK Equity Income capability for the first time in some years.
“For TSW, we have seen a moderation. There are some allocation moves away from equities and into fixed income, and some redemptions are coming through but at a slower rate.”
AUTHOR
Laura Dew
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