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Doubts raised about benefits of KKR deal for Perpetual shareholders

By Maja Garaca Djurdjevic
3 minute read

Morningstar’s equity analyst, Shaun Ler, has weighed in on KKR’s proposed acquisition of Perpetual’s wealth management and corporate trust businesses, emphasising the potential undervaluation of these assets in the current stock price.

Perpetual is set to become solely focused on asset management with chief executive Rob Adams retiring, the firm announced on Wednesday following a six-month strategic review.

In an outcome of the review filed to the ASX on Wednesday morning, the firm said it has entered into a scheme of arrangement where private equity firm Kohlberg Kravis Roberts & Co (KKR) will buy its corporate trust and wealth management businesses for total cash consideration of $2.2 billion.

In his analysis of the deal on Thursday, Ler said the proposed acquisition, recommended by Perpetual’s board, indicates a step towards capital return to shareholders, with the offer exceeding Morningstar’s valuation expectations. However, uncertainties regarding costs, taxes, and the separation process pose challenges in assessing the deal’s impact on intrinsic value.

“The face value of the offer is above our expectations and represents a step toward a capital return to shareholders. However, the lack of cost details on the transaction, the separation, and the capital gains tax make it difficult to ascertain whether or not the deal is accretive to our current intrinsic assessment,” Ler said.

“We retain our stand-alone fair value estimate of AU$26 per share for now.”

Ler explained that the acquisition, structured as a scheme of arrangement with a gross cash consideration of $2.2 billion, which equates to $19.20 per share, exceeds Morningstar’s valuations for the targeted businesses which is at $1.5 billion or $13.6 per share.

“This means that for the deal to be accretive to our fair value estimate, associated costs and taxes need to be below $630 million,” Ler said.

“While we anticipate transaction and separation costs to be contained within 10–20 per cent of the deal value (as with past asset management mergers and acquisitions), tax implications are uncertain, seemingly even to the Perpetual board and management.”

Ler also assessed that should the deal be finalised and Perpetual shareholders retain ownership of Perpetual Asset Management, they could face heightened earnings volatility, given the asset management business’ increased competitive pressures compared to wealth management and corporate trust.

“Our intrinsic assessment for Perpetual Asset Management is $15.40 per share, while total corporate costs amount to negative $3.10 per share,” Ler said.

“Shareholders are expected to receive cash proceeds – likely via a capital return – following the repayment of Perpetual’s group debt – currently $771 million – along with transaction and separation costs, and other specific business outlays,” he continued.

“We don’t expect much surplus capital to be retained for the asset management business, given its capital-light nature.”

Perpetual on Wednesday revealed that its board “unanimously recommends that Perpetual shareholders vote in favour of the scheme of arrangement”.

The KKR deal was the result of a strategic review spanning several months, which the firm said found a separation of Perpetual’s businesses would remove the “conglomerate complexity” which has made it challenging for the market to value Perpetual Group.

On the asset management business that will remain following the deal, Perpetual said it would be “debt free” with $227 billion in assets under management.

Given that, according to the firm’s ASX filing, the Perpetual brand will transfer to KKR, the asset management business will rebrand to become a “new and focused-multi boutique, asset management business” by 31 December 2025.