To escape Pendal merger, Perpetual will have to pay

In the face of an alternative buyout offer and criticism regarding the merits of the deal, Perpetual’s takeover of Pendal Group likely will go ahead after the NSW Supreme Court ruled the stalling suitor would be liable for unspecified financial remedies if it were to walk away.

The relationship between the two domestic funds management stalwarts has frayed in recent weeks after a buyout proposal for Perpetual emerged from a consortium comprising Regal Partners and private equity outfit BPEA EQT.

At the lodgement of the scheme implementation deed (SID), which is typically a formality, Perpetual requested the court delay the scheme process by seven days. Pendal said an exclusivity agreement the companies signed in August was legally binding and that Perpetual could not walk away.

In a November 17 ruling, Justice Ashley Black found Perpetual could in fact be ordered to pay relief above the $23 million break fee, although he noted an actual judgement would depend on the specific circumstances. Perpetual acknowledged the outcome in a market announcement following the ruling.

“The court declared that the payment of $23 million, should the Perpetual board seek to exercise its fiduciary carveout in the SID, does not exclude Pendal’s right to seek specific performance or injunctive relief,” the company said. “This is the case even if the Perpetual board determines that it is in the best interests of its shareholders for Perpetual to do so.”

The Regal-BPEA consortium lobbed two bids, with the current offer at $33 per share. Perpetual has rebuffed both, but it said its fiduciary responsibility to shareholders meant it must engage with an alternative bid should it represent better value.

The ruling means any acquisition of Perpetual likely would need to factor in potential compensation to Pendal, adding more complexity to the deal. Regal wants to secure Perpetual’s funds management business and its $90 billion in assets, while BPEA-EQT would own the valuable corporate trust division. 

Sweetened deal

After emerging from a trading halt, Perpetual shares finished the day down 12.63 per cent at $27.59. Conversely, Pendal shares shot up nearly 11 per cent to $4.93.

The Pendal share price is now trading at an 11 per cent discount to the implied price of the deal. Last week it was languishing at a 34 per cent discount as markets bet the deal wouldn’t go ahead.

In a separate agreement to the court proceedings, Perpetual and Pendal announced a rework of the scheme. Under the deal, Pendal shareholders would now receive one share in Perpetual for every seven currently owned, plus a fixed consideration of $1.65, minus any dividend paid.

This reduces the amount of debt required to fund the merged entity. Perpetual and Pendal shareholders would own roughly half of the company each, compared with Perpetual previously owning a marginally bigger slice of 53 per cent.

Benefits remain unclear

From the get-go the market has doubted the rationale behind Perpetual’s plan to subsume Pendal given uncertainty over management’s ability to extract synergies and earnings-per-share growth.

MST Financial analyst Lafitani Sotiriou (pictured) said in a note to clients in September Perpetual would be better off walking away from the deal and instead optimising its current portfolio of assets.

“Not only do we think Perpetual’s board should back out of the Pendal transaction, but we also think their shareholders will be better served by a reverse in strategy,” the note said.

Andrew Brown, founder of hedge fund East 72, highlighted the direct contradiction between the Perpetual board rejecting the consortium’s bid because it “materially undervalues the company” and the board’s decision to issue new shares at $27.

“If they are undervalued at $33, the Perpetual board should be buying them back,” Brown concluded.

Lachlan Buur-Jensen

Lachlan is an experienced journalist writing across The Inside Investor and The Inside Adviser.