Pendal/Perpetual deal could see $283b FUM by 2027: Morningstar

Morningstar has recommended Pendal shareholders vote in favour of the Perpetual acquisition as it will offer them a higher value per share than if the firm remains independent.

The firm said it believed the acquisition was likely to proceed and would be in shareholders’ best interest.

As a combined entity, the combined group was expected to grow FUM at 8% per year to $283 billion by fiscal year 2027, from $194 billion in September 2022.

It did expect a loss of flow totalling 9% of combined funds under management, however, initially following the merger and that only half of the targeted cost synergies of $60 million would be achieved.

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“We model incremental redemptions (from the merger) totalling $17 billion over fiscal 2023-2024. This is 9% of current combined FUM, or about half of the group’s cash and fixed income FUM, where we see higher risks of strategy duplication and fund closures.”

However, these risks were priced in, the firm said in an equity analyst note, and “material attrition” of FUM could be avoided by maintaining autonomy, segregating distribution and offering higher remuneration to retain staff.

“We estimate Pendal shareholders will get more value from the deal which we estimate values Pendal at $6.70 per share. This is higher than if Pendal remain independent, with a standalone fair value of $6.45 per share.

“Within the $6.70 fair value for Pendal, $5.08 is the value attributable to Pendal shareholders in the combined entity (49%), with an additional $1.62 in cash. While the merger has risks, the potential downside from FUM loss or cost blowouts are more than priced in. We think Perpetual can avert a material attrition in FUM. There is also room to rip out costs from centralising operations.”

An acquisition by Perpetual could also allow Pendal shareholders to “be part of a diversified group that’s not solely hostage to the ebb and flow of investment cycles” as Perpetual had its Perpetual Corporate Trust and Perpetual Private offerings.

“We don’t expect the acquisition of Pendal by Perpetual to be accretive, either in earnings per share or intrinsic value terms, to Perpetual shareholders. But we also don’t think the value erosion will be as drastic as Perpetual’s current share price implies.

“Lastly, we believe Perpetual’s assets have greater monetisation potential through corporate actions, something that would not be available to shareholders of Pendal if it remained a standalone entity.”