Perpetual soars after saying ‘no thanks’ to Regal's takeover bid

Perpetual (ASX: PPT) found itself in rare company in early afternoon trading, with the fund manager being one of only 26 stocks on the S&P/ASX300 trading higher, after jilting a recent takeover bid.

Perpetual, which in August made a $2.5bn bid for rival investment manager Pendal Group (ASX: PDL), was up 7.8% at noon after notifying the market it has said 'thanks but no thanks' to a $30 per share offer from Regal Partners and BPEA Private Equity Fund VIII.

Interestingly, Pendal was trading around -12% lower in early afternoon trading.

No dice

Having concluded that the current unsolicited conditional, non-binding $30 per share ($1.74bn) offer materially undervalues the group, Perpetual board believes that it is not in the best interests of its shareholders to proceed.

Based on its last close, the $30 per share offer represented a thin 11% premium and 23% premium to the 30-day volume weighted average price.

Meantime, Regal said the consortium would now “seek to understand the Perpetual board’s rationale and constructively engage with their concerns”.

Whether this means a better offer will follow remains to be seen.

Short selling

While Perpetual remains committed to progressing its $2.5bn cash and scrip acquisition of Pendal Group, a cohort of investors have been quick to place their bets on future outcomes.

With short selling on the stock having recently hit abnormally high levels, Perpetual is now one of the 10 most shorted stocks on the ASX.

By shorting Perpetual and going in long on takeover target, Pendal, traders expect their punt to return in spades when Pendal shares convert into Perpetual stock on completion of what is a scrip-heavy acquisition.

$200bn merged entity

Following the thumbs up from Pendal investors, there doesn’t appear to be anything materially blocking the deal’s expected completion in January 2023.

Assuming the deal is done, Perpetual expects to control the majority of 53% shares and board seats in the combined business.

Based on current numbers, the combined asset manager would manage $201bn of assets – making it one of the top five Australian asset management by size - and hence gives it the necessary scale to go head-to-head with low-cost passive funds.

The $757m cash component is expected to be funded with a new debt facility that will refinance an existing package used to fund Perpetual’s acquisition of US fund manager Barrow Hanley.

The additional debt will remain under the group’s target gearing limit of 30% and will result in a gearing level of 1.7 times gross debt to pro forma earnings.

What brokers think

Perpetual’s share price is down around -23% over the past 12 months, and until today, has been on a sharp downward trajectory since 22 August.

Consensus on Perpetual is Moderate Buy.

Based on Morningstar’s fair value of $34.11 the stock appears to be undervalued.

Based on the six brokers that cover Perpetual (as reported on by FN Arena) the stock is currently trading with 6.6% upside to the target price of $30.44.

Citi expects the Pendal acquisition to earnings accretive to Perpetual and retains a Buy rating while the target is lowered to $29.10 from $30.00. (20/10/22).

UBS remains weary of Perpetual's prospects post-merger with Pendal and retains a Neutral rating with the target price falling to $26.60 from $29.50. (20/10/22).

Perpetual's share price over three months.