Rationalisation afoot in the funds management industry with Sydney-based Perpetual revealing an offer to pay $2.4 billion for a rival in the same city, Pendal, the old investment arm of Westpac.
It’s a deal that could create an investment group with more than $200 billion in total assets, and the market reaction yesterday tells us Pendal will have some work to do to see it off.
Perpetual has made a conditional, non-binding proposal to acquire Pendal’s at an indicative price of $6.23 a share compared to Friday’s close of $4.47.
That saw Pendal shares leap 23% to $5.54 yesterday, before they fell back to close up 18% at $5.39 – a long way short of the indicative price.
Perpetual’s shares dropped 6.6% to $31.97.
But it is early days in the battle of non-binding and indicative prices and the deal will be done eventually if Pendal can’t convince its shareholders that the long slide in its share price over the past five years can be reversed.
The bid, if successful, would see Pendal’s shareholders own 48% of the merged entity and Perpetual own the remainder. While some early commentary has described Perpetual as being ‘opportunistic’ in launching a bid with markets volatile in the wake of the Russian invasion of Ukraine, that’s a silly argument.
Perpetual is merely doing what companies have done for decades – taking advantage of a weakness in a rival and moving to take advantage of a low share price. It’s an essential part of capitalism.
Pendal says its board will assess the proposal, but in a statement hinted at its possible opposition (or a push for a higher price) by suggesting that significant instability is creating market volatility which may impact the share value of the deal.
“The Pendal board notes that the indicative proposal has been put forward at a time when significant geopolitical instability, the economic impacts of the ongoing COVID-19 pandemic and broader market volatility has disrupted the global markets in which Pendal operates.
“This has materially impacted the trading values of global asset managers which may not currently reflect their long-term potential to deliver attractive returns to investors.”
But that doesn’t explain the 50% fall in the Pendal share price from early last September when they traded at $8.99 to Friday’s $4.47. That opened up an opportunity for a bidder and Perpetual took it on Monday.
On January 4 of this year, the shares fell 20% at one stage and ended down 16% after Pendal revealed a $6.8 billion outflow of funds under management in its first quarter (to the end of December).
The $6.8 billion net outflow was driven largely from its European operations, which saw a large $5.5 billion outflow. This was driven by two notable redemptions from segregated mandates by UK institutional clients during the quarter (which the company warned about earlier in the year).
Since then, the shares have slipped further. Up to Friday’s close, Pendal shares had fallen more than 50% in just over five years.
Pendal is due to issue an update shortly on its funds under management for the March quarter (its second and first half). That performance could very well decide Pendal’s fate.
