A new research report from Morningstar has estimated that Pendal shareholders will get more value from Perpetual’s proposed acquisition of the investment manager.
The takeover, which was originally announced in August before hitting a number of major roadblocks, is estimated by Morningstar to value Pendal at $6.70 per share, which is more than if it remained independent with a standalone fair value of $6.45 per share.
In its report, Morningstar recommended that Pendal shareholders vote in favour of the deal, which it expects to proceed.
Pendal’s board of directors has also unanimously recommended that shareholders vote in favour.
“While the merger has risks, the potential downside from FUM [losses] or cost blowouts are more than priced in. We think Perpetual can avert material attrition in FUM. There is also room to rip out costs from centralising operations,” said Morningstar equity analyst Shaun Ler.
Morningstar has incorporated Pendal into its earnings forecasts for Perpetual and lowered the fair value estimate for the latter’s shares from $38.00 to $35.50 per share.
“We now assume an additional loss of flow totalling 9 per cent of the combined funds under management, or FUM, alongside our unchanged assumption that only half of the targeted cost synergies of $60 million will be achieved,” said Mr Ler.
According to Mr Ler, Pendal shareholders have more avenues to realise value through Perpetual, including by gaining exposure to Perpetual Corporate Trust (PCT) and Perpetual Private (PP), and being part of a diversified group that is not “solely hostage to the ebb and flow of investment cycles”.
“Compared with the investments business, PCT and PP have fewer competitors, and have delivered steadier profit growth in the last five years,” he said.
“Also, Perpetual’s performance track record in the investment business is presently stronger than Pendal’s, improving the chances of mandate wins.”
Morningstar does not expect the acquisition to be accretive either in earnings per share or intrinsic value terms to Perpetual shareholders, but the firm also does not believe that the value erosion will be as drastic as implied by Perpetual’s current share price.
“There is potential for FUM loss from closing identical strategies, and synergies may be offset by cost inflation or reinvestments,” Mr Ler said.
“However, efforts like maintaining autonomy, segregating distribution (to minimise cannibalisation among its own boutiques) and potentially higher remuneration will likely succeed in retaining staff and preventing large redemptions.”
The combined entity is forecast to grow its FUM by 8 per cent per year, rising from $194 billion in September 2022 to $283 billion by FY27, with portfolio returns of 10 per cent per year and net outflows of $22 billion over Morningstar’s forecast period.
Pendal shareholders are scheduled to vote on the proposed acquisition by way of a scheme of arrangement at a meeting on 23 December. Perpetual also recently announced the notional appointment of the executive committee that will lead the combined group.
