Perpetual tipped to be exposed to greater earnings volatility as standalone fund manager
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The news: The pure play funds management business that Perpetual is set to become will be exposed to greater earnings volatility, analysts said, as they also criticised the lack of cost details which made it difficult to evaluate whether the KKR acquisition benefits shareholders.
The context: Morningstar analyst Shaun Ler said if Perpetual became a standalone funds management business, shareholders would be exposed to greater earnings volatility as the business faced more competitive intensity than its wealth management and corporate trust arms.
Ler noted that the lack of cost details on the transaction, the separation and capital gains tax made it difficult to conclude whether the deal would benefit shareholders.
Similarly, Morgan Stanley analysts said while the sale price of $2.2 billion was a “strong headline figure” at first glance, net proceeds were not clear given the lack of cost detail and that the tax liability was likely to be material. Both Morgan Stanley and Morningstar said the sale price exceeded their expectations of around $1.5 billion.
Jarden analysts said the low visibility on net proceeds undermined the outcome of the strategic review. They noted that the tax liability on the sale of its corporate trust and wealth arm should at most be around $525 million to $550 million at most.
Morningstar said for the deal to be beneficial to shareholders, associated costs and taxes needed to be below $630 million. The research house anticipated transaction and separation costs to be contained within 10% to 20% of the deal value. Morningstar’s intrinsic assessment for Perpetual asset management was $15.40 per share, while total corporate costs amounted to a negative $3.10 per share.
Following the announcement of the sale, Jarden lowered its price target for the stock to $24.55 from $26.50 while Morningstar kept its price target of $26, as did Morgan Stanley at $26.10.
Perpetual’s share price fell 2.11% to $21.85 in early trading on the ASX after losing almost 7% yesterday following the announcement of the deal. Over the last 12 months its stock has decreased 13.16%.
On Wednesday, Perpetual confirmed that private equity firm KKR would acquire its corporate trust and wealth management businesses, subject to a shareholder vote. Analysts on the investor call following the announcement were scathing in their assessment, saying Perpetual did not provide “basic information” and asking if the deal was “a joke”.
The sources: Morningstar research, Jarden research, Morgan Stanley research
