Pendal’s Board has been caught napping as Perpetual has fronted up with a conditional scrip and cash offer for the business. PDL’s initial response has been to reject the bid on the grounds it ‘significantly undervalues the current and future value of Pendal’ and is therefore not in the best interests of shareholders. Awakened from its torpor, the PDL Board announced a $100 million on-market share buyback.
PPT’s conditional offer valued PDL at $6.23 per share on 1 April 2022 when the bid was made. This was a 39% premium to PDL’s share price of $4.48 at the time. The proposal would have given PDL a 48% pro forma ownership of a combined entity with FUM around $240 billion (PDL $125 billion) and estimated annual cost saving synergies of $50 million.
PDL’s Board considered the proposal for about a week and decided it was not in the best interests of shareholders. PDL said it already had some of the most respected investment talent in the world, a global distribution footprint, a growing capability in sustainable and impact investing and is well capitalised. We note that PDL would have not lost any of these aspects in a combined entity with PPT although, as we have previously written, PDL’s cost-to-income ratio is hardly frugal.
PDL’s Board also pointed out the PPT bid was ‘materially below PDL’s underlying standalone value’.
So, why did it take so long for PDL’s Board to announce a share buyback?
And why has the PDL Board not even engaged with PPT to investigate a potentially better offer?
We think PPT can increase the cash component by about 20-40% before the deal becomes unattractive. This would imply an overall 5- 10% increase in the full proposal offer.
PDL released its quarterly net flow and FUM update showing a hefty negative mark-to-market move of -$7.0 billion and net flows of -$0.7 billion. PDL’s 1H22 result is due to be released on 10 May and we would expect further commentary in regard to PDL’s strategy to deliver better value on its own as opposed to the PPT proposal.
Investment view
PDL needs to get its house in order, particularly with regard to its cost base, and deliver on its strategy. The buyback appears to have been flushed out by PPT’s bid, but on its own does not achieve the Board’s acclamation of significant value. There is room for PPT to put more heat on PDL with an improved offer so shareholders should at least wait for this possibility.
Risks to investment view
PDL might not achieve satisfactory investment returns which would risk net outflows and FUM reduction leading to earnings declines. Like all fund managers, PDL carries key investment personnel risk which is a potential negative if key staff leave.
Recommendation
We have retained our Buy recommendation.
