Soul Patts: The Perpetual bid, portfolio resilience and more activity to come

At Livewire Live in September, Washington H. Soul Pattinson (ASX: SOL) Chairman Robert Millner said “we’re quietly confident that we can start to see some bargain hunting coming in the next few months or early in the new year.”

Well, the bargain hunting appears to have started in earnest. On Wednesday, Soul Patts disclosed it had lobbed a $3 billion bid for Perpetual (ASX: PPT).

But deal flow doesn’t just come in the form of billion dollar bids. The company provided a first quarter trading update on Friday which noted almost $470 million in committed but undrawn investments across portfolios including private equity, credit and equities.

“We believe it is prudent and opportunistic to have cash on hand in the current environment and are expecting another reasonably high level of activity in FY24,” Chief Executive Todd Barlow told investors on Friday.

“As always, our approach to portfolio construction will be disciplined, targeting high quality businesses that bring diversity and strong cash generation.”

The Perpetual bid

Soul Patts offered to acquire and split up Perpetual’s three businesses – Wealth Management, Corporate Trust and Asset Management – for an implied equity value of $3 billion. This is comprised of:

• $1.06 billion WHSP scrip for Wealth Management and Corporate Trust businesses
• Estimated $2.0 billion scrip for the Asset Management business

“We had a view that the sum of the parts was worth more than the market capitalisation at the time,” said Barlow.

“Not only did we accumulate a significant interest of up to 9.99%, we turned our mind to whether there was a value enhancing opportunity that we could provide to the company.”

The offer values Perpetual at $27.00 per share or a 28.6% premium to its undisturbed closing price of $21.00 on 13 November – The day before Soul Patts substantial shareholding notice became public.

Sequence of events

The bid overshadowed an earlier announcement from Perpetual, which outlined the same value-unlocking strategy through the separation of its Corporate Trust and Wealth Management businesses. But in doing so, Perpetual could incur an unfavourable capital gains tax bill.

This is why Barlow argued SOL’s proposal to be a “unique opportunity for Perpetual shareholders to unlock value in a tax efficient structure.”

But Perpetual still rejected the bid after market close on Wednesday, saying it “materially undervalues” the company’s businesses.

A strategic review, a takeover bid and the bid’s rejection all within 12 hours – Wild.

Why not just buy the whole thing?

A Soul Patts spokesperson said: “Perpetual only just bought Pendal and that acquisition was touted as a growth driver and a game changer. There’s still synergies to be realised through Pendal and they seem quite confident that they can achieve that.”

For context, Perpetual's $2 billion takeover of Pendal was completed back in January.

“We found it more straightforward to value those two other businesses versus the asset management business and give it [PAM] the sole management focus that it is deserving of.”

While the bid was shot down rather quickly, Soul Patts said it is committed to constructively engaging the Perpetual Board and welcome their decision for a strategic review.

Beyond the Perpetual bid

Turning to FY24 and the first quarter ending 31 October, Soul Patt’s portfolio returned -0.4% compared to the -7.3% of the All Ords.

Back in October, the company announced it had axed $1.4 billion in equities and redistributed much of that capital towards alternatives such as private equity, agriculture and credit – Assets that are typically uncorrelated to equity markets.

“During the first quarter we made another acquisition in the Private Equity Portfolio adding one of the most advanced fruit packing and processing plants globally to our agriculture portfolio,” said Barlow.

“We have continued to add to the Credit Portfolio and we also made a significant investment in the Emerging Companies Portfolio into NexGen Energy which is developing the largest low cost producing uranium mine globally.”