Merger recap. On 25 August 2022, PDL announced it had entered a Scheme Implementation Deed with PPT under which PPT would acquire all the shares on issue 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. The cash component will be debt funded.
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.
The combination of seven boutique brands still requires each brand to stand on its own investment performance. There is limited scale benefit to PPT as a group on this basis. We note the Australian equities businesses of each company are to be managed separately and will have their own dedicated but separate distribution, contradicting PPT’s claim of an enhanced global distribution platform.
The expected synergies are based on an 8% reduction in the combined group cost base, with a one-off A$110m cost of implementation. We note that PPT’s FY22 cost growth of 20% fell within its guidance range of 18-22% growth. While FY23f cost growth guidance was just 4-6% for PPT alone, it suggests that achieving the cost synergies between PPT/PDL may not be difficult.
Where the deal begins to look less compelling, in our view, is the comparison to global funds management peers. PPT/PDL may be the largest Australian global fund manager, but the competition outside Australia is fierce. Both PDL and PPT are mostly traditional equities managers which does not set them apart from the likes of AllianceBernstein, Artisan Partners, T Rowe Price and others.
The PPT/PDL combination will not make either fund manager less prone to net fund flows. Retaining all the individual brands leaves this risk unchanged across the combined group.
PPT Corporate Trust becomes diluted.
One of PPT’s key points of difference is its large Corporate Trust (CT) business which now has over $1 trillion in FUA (funds under management).
CT has been growing at ~20% over the last few years and carries a high strategic value.
The recent acquisition of Australian Executor Trustees ($A5.5bn of FUA) by EQT Holdings for A$135m valued the trustee business at 12x EV/EBITDA. This is over double the 5.5x EV/EBITDA PPT currently trades on.
PPT’s CT business accounted for about one third of PPT group EBITDA in FY22. This will fall to ~15% post-merger completion.
The CT business is the main reason why around 40% of PPT’s business is non-market facing. This provides an unusual but valuable defensive aspect to PPT’s earnings.
Whilst PPT’s CT business is essentially ‘hidden’ from investors from a valuation perspective, there remains a risk that combined PPT/PDL valuation multiple carries little to no attribution for the CT business.
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.
PPT has been reporting net negative fund flows for 19 of the last 22 quarters.
The merger with PDL does provide scale benefits and will give new CEO a strategic focus around synergies benefits over the next 2-3 years. There remains a risk post-merger that net fund-flows accelerate given fund overlap.
We remain sceptical that the merger creates inherent long-term value for PPT shareholders. The two most prospective growth businesses within PPT – Corporate Trust and Wealth Business will be effectively diluted under the merger.
The significant underperformance of the PPT share price since the deal was announced is partly due investor positioning whilst the approval process under way. This does suggest a short-term bounce in the share price is possible if the deal is approved.
Longer-term term post-merger approval, we remain circumspect on the value creation. PPT PER multiple has collapsed over the last 6 months, but is arguably only brings the multiple in line with global asset management peers.
With prospect of on-going net fund outflows, in more difficult operating environment over the next 12 months we rate PPT a Hold.
Risk to investment view
The key risks for PPT include regulatory and compliance issues, key person retention and integration risks around the various acquisitions. We also focus on the cost-to-income ratio that is a key earnings driver.
Recommendation
We have lowered our recommendation from Buy to Hold.
Figure 1: PDL share price has consistently traded at a discount to PPT merger ratio.
Figure 2: PPT and peer Australian asset managers have derated significantly. Now trade in-line with global peers.
Figure 3: Business split pre/post-merger
Figure 4: Asset managers valuations. Australian managers now trade in-line with global peers, with similar growth prospects.
