Merger recap. On 25 August 2022, PDL announced it had entered a Scheme Implementation Deed with Perpetual (PPT) under which PPT would acquire all the shares of PDL.
The deal was structured as cash ($1.976 per PDL share) plus 1 PPT share for every 7.5 PDL shares. As of 24 August 2022, PPT’s share price closed at $30.30 per share valuing PDL at $6.016 per share compared to its closing price of $4.48 per share, implying a 25% control premium.
Since then, both companies’ share prices have fallen, PPT by ~20% and PDL by ~3%. The S&P/ASX200 has fallen by 3% over the same time. On the current share prices of each company (PPT $24.50, PDL $4.74), the deal currently values PDL at $5.24 per share vs PDL last close of $4.72.
PDL’s Board has unanimously recommended the proposal
Merger rationale. The deal was framed as a ‘combination of two iconic financial services firms’ creating Australia’s pre-eminent global asset manager with total assets under management (AUM) of ~A$201 billion (PPT $90bn, PDL $111bn) spread across Australia (A$62bn, USA A$109bn and Europe A$30bn).
The combined group will house seven boutique brands with A$15 billion of AUM as dedicated ESG funds. The estimated A$60m of annual synergy benefits (pre-tax) will be delivered within two years of completion of the deal.
Our view of the merger. In our view the environment for PDL to return to net-inflows near-term remains challenging given the market backdrop, and the likelihood of continued soft momentum in retail and legacy Westpac Banking Corp (WBC) outflows. There are few new strategies/product launches to open-up new fund flow opportunities.
Against this backdrop, we think the proposed merger with PPT makes sense for PDL. In our view, a combined business offers a stronger growth platform, and a wider array of investment strategies than PDL has as a standalone.
Greater scale and a larger platform provide PDL with a stronger defence against the ongoing threat of fee and margin compression.
The revised merger terms imply a +25% control premium for PDL, which at current share prices of PDL and PPT, imply 15% upside for PDL shareholders in the merged entity.
Investment view
Share prices of asset managers need to see a period of positive fund inflows and risk-on market sentiment to outperform the market.
PDL has been reporting net negative fund flows for 19 of the last 22 quarters.
We are concerned that fund flows will remain soft over the next 12 months, given our expectation of a more challenging equity market backdrop (FUM growth is closely tied to equity prices) and the further fade in the WBC legacy relationship which is likely to be a drag on funds flows.
There is limited new product from PDL to drive FUM growth. This leaves earnings vulnerable to industry wide fee pressure. PDL remains underweight the high growth areas of the market in Alternatives and ESG-focused funds.
The Agreed merger with PPT is something which needs to happen for PDL shareholders in our view. PDL standalone is subscale and lacks convincing growth options. A PPT/PDL improves the growth outlook for PDL, whilst also allowing PDL shareholders to take some money off the table given the cash component of the merger terms.
At current prices, PDL is trading at a 15% discount to the PPT merger terms, which suggest PDL offers better than PPT currently.
PDL’s 12mth PER multiple has de-rated from 18-20x to 11-13x, which is in line with global traditional asset managers (PPT PER multiple is a little different). Given the challenges for the underlying business, and the prospects for fund flow outlook we have lowered our rating from Buy to Hold.
Risk to investment view
PDL might not achieve satisfactory investment returns which would risk net outflows and FUM reduction leading to earnings declines. PDL has improved its relative performance in the last year, and this is important for the firm to attract and sustain healthy net-flows.
Like all fund managers, PDL carries key investment personnel risk which is a potential negative if key staff leave. We see key person risk across the various funds in JO Hambro, Pendal and TSW as a key concern.
Finally, we see the integration of TWS as providing some near-term risk along with geopolitical shocks.
Figure 1: Australian asset managers p/e multiples have by >30% since 2020-21
Figure 2: PDL and peer Australian asset managers per multiples have derated significantly. Now trade in-line with global peers.
Figure 3: PDL share price has consistently traded at a discount to the PPT merger ratio. Currently trading at 15% discount
Figure 4: Business split pre/post-merger
Figure 5: Asset manager’s valuations. Australian managers now trade in-line with global peers, with similar growth prospects.
