Morningstar unsure if KKR's Perpetual bid benefits shareholders

Morningstar has maintained its fair value estimate of $26 per share for Perpetual stock, even after KKR confirmed it will buy its wealth management and corporate trust businesses yesterday.

Morningstar analyst Shaun Ler said KKR's proposed acquisition of Perpetual's wealth management and corporate trust businesses supports their view that its current stock price undervalues these assets.

"The face value of the offer is above our expectations and represents a step toward a capital return to shareholders," he said.

However, he added that uncertainties regarding transaction costs, separation expenses, and capital gains tax make it difficult to determine if the deal is accretive to Morningstar's intrinsic assessment.

KKR offered $2.2 billion in cash, which equates to $19.20 per share. This offer is higher than Morningstar's combined valuation of $1.5 billion or $13.60 per share, for the wealth management and corporate trust businesses.

"This means that for the deal to be accretive to our fair value estimate, associated costs and taxes need to be below $630 million. While we anticipate the transaction and separation costs to be contained within 10-20% of the deal value - as with past asset management and merger acquisitions - tax implications are uncertain, seemingly even to the Perpetual board and management," Ler said.

If the deal goes through, Perpetual shareholders will retain ownership of Perpetual Asset Management but would likely face greater earnings volatility because the asset management business' more "competitive intensity" compared to wealth management and corporate trust.

Ler said shareholders can expect to receive cash proceeds, probably through a capital return, after paying off Perpetual's group debt - currently $771 million - in addition to transaction and separation costs, and other specific business expenses.

He also doesn't expect much surplus capital to be retained for the asset management business, given its capital-light nature.

The estimated cash proceeds to shareholders, along with details on transaction, separation, and tax expenses will be communicated when Perpetual reports it full year results in August.

Citi analysts noted that the market has reacted negatively to KKR's offer, with Perpetual's share price tanking over 7% yesterday and continuing to decline today. The broker attributed this to the announcement lacking critical details, such as the exact amount of proceeds shareholders will receive and the extent of separation and stranded costs.

Citi also noted that the long-established brand is part of the sale to KKR, which means the remaining asset management business will need to change brands, most likely by 31 December 2025.

"... the domestic asset manager will move from having a well-known and long trusted brand to a completely new one. We see this as presenting some risk, albeit the ability to use the brand on funds for a further seven years perhaps mitigates this to some degree," Citi said.