Perpetual Limited (PPT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Perpetual Investor Briefing. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susie Reinhardt, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our investor briefing today, where we will talk through the investor presentation released this morning regarding the outcomes of the strategic review and answer any questions you may have. Here to present the review outcomes are Rob Adams, Perpetual's CEO and Managing Director; our Chairman, Tony D'Aloisio; and our CFO, Chris Green. Before we begin today, we would like to acknowledge the traditional owners and custodians of the land on which we present from today here in Sydney, the Gadigal people of the Eora Nation, and recognize their continuing connection to land, waters and community. We pay our respects to Australia's First Peoples and to their elders, past and present. We would also like to extend our respect and welcome to any Aboriginal or Torres Strait Islander people who are listening in today, and acknowledge the traditional custodians of the various lands on which you will work today. As mentioned, there will be an opportunity to ask questions at the end of the presentation. [Operator Instructions] Please, can we ask that we start with 2 questions each to ensure we have time for all analysts who came to ask questions. Before I hand over to Rob, we would like to draw your attention to the disclaimer on Page 2 of the presentation. Rob, over to you.

Thanks, Susie, and good morning, everybody. Thanks for joining us on this call. Today, we announced the outcomes of the strategic review that we announced back in December of last year, following what has been a very comprehensive process to explore the potential benefits of separating our Perpetual Group businesses and creating a stand-alone Asset Management business. The Board has determined that separating Perpetual's 3 businesses will deliver strong value for our shareholders. As a result of the review, Perpetual will demerge and will become a leaner ASX-listed pure-play global multi-boutique asset management business with scale, diversification and a strong balance sheet. The Corporate Trust and Wealth Management divisions will be acquired by KKR for a cash consideration of $2.175 billion via a Scheme of Arrangement, which represents an attractive valuation of both businesses of 13.7x EBITDA and 16.3x EBIT based on the last 12 months reported earnings. We believe this is a positive outcome for shareholders, for our clients and employees as the culmination of, as I said, a complex and very thorough review process. The Board of Perpetual unanimously recommends that Perpetual shareholders vote in favor of the Scheme of Arrangement, which we expect to occur in February 2025, following the satisfaction of conditions. I'll now hand over to our Chairman, Tony D'Aloisio, to talk through the background of the strategic review. Tony?

Thanks, Rob, and good morning, everyone. Just to pick up Rob's last point, from the Board's perspective, I think I'll -- as this slide shows, I'll just make 4 key points. The first is this has been a very comprehensive and well-flagged process over the past 5 months. It's been robust, disciplined and given us the confidence that we have an offer for shareholder vote. We have the best offer for shareholder vote. We're pleased that we have a proposal which is superior to alternatives in terms of price and deliverability. The cash offer provides a dual benefit of a cash return to our shareholders immediately on the completion of the transaction, and it provides them with continued ownership of an asset management business, which is much better positioned, for example, be deleveraged to improve our performance. And it removes that conglomerate discount, which our shareholders have urged us to look at over time. So from the Board's perspective in the unanimous recommendation to shareholders, they are the 4 key points. I'll now hand back to Rob and then to Chris to go through a lot more of the detail in what's before you.

Thanks, Tony. With over AUD 225 billion in assets under management across all key regions covering all key markets and key channels, following the transaction, shareholders will own a more streamlined and debt-free global Asset Management business. As I'm sure everybody knows, this business has 7 unique brands across the 7 boutiques that we operate. And within each boutique, we have highly experienced world-class investment professionals who, in combination, manage more than 100 different strategies, many of them global strategies, many of them relevant across markets. Our Asset Management business has a distribution team that covers all of those key markets and each channel globally. And importantly, the stand-alone business will be a debt-free organization, as Tony said, and it will be, as I mentioned, a far leaner organization because it will be a monoline business focused on one thing and one thing only, and that's asset management. Turning to the next slide. It's been a journey over the last 5 years for Perpetual. And our Asset Management business today is entirely different to the business that existed when I started in this role back in 2018. Back in 2018, Perpetual's Asset Management business was an Australian-only business, managing Australian assets for Australian clients. With around $30 billion in assets under management, and as asset allocators in Australia increasingly were allocating more and more of their clients' monies, whether it be retail or institutional, outside of Australia, we were, therefore, becoming increasingly less relevant. Our strategy at the time was to grow and to diversify our Asset Management business footprint, to add global investment capabilities, to build scale, and to build the diversity of our earnings streams and potential sources of growth in the future to basically put the business on a stronger footing over the longer term. So we set about utilizing our balance sheet appropriately, and we acquired the businesses of Trillium, Barrow Hanley and, more recently, Pendal, to create what we have today, which is a truly global multi-boutique Asset Management operation. As I said, with high-quality investment teams, managed by teams with deep experience, who are highly respected in their categories, supported by a global distribution team. And those teams, you've seen this slide before that show the capacity that we now have for future growth. So from our existing capabilities today, we have over $1 trillion in potential capacity for growth. The acquisition of Pendal, obviously, was fundamental in getting us to this point. So I think it's important to reflect on that journey of being a domestic Asset Management business only to now being a truly global firm with global reach and global relevance to a global client base. I'll now hand over to Chris to talk through the transaction structure.

Thanks, Rob. As we've covered, following this transaction, Perpetual shareholders will become shareholders in a stand-alone Asset Management business, and Corporate Trust and Wealth Management will be acquired by KKR via a Scheme of Arrangement. The proceeds that we return to shareholders will be net of the debt repayment, separation and transaction costs as well as other customary business-specific net debt costs. . We've worked through that, but there will be further work required to get through the detail, and therefore, we expect to be able to communicate the estimated cash return per share at our FY '24 results. Importantly, shareholders will have the opportunity to vote on the transaction, and we expect the Scheme Booklet to be released to shareholders late this calendar year, with a Scheme meeting and completion expected in February next year. Going to the next slide, we've detailed some of the key terms of the Scheme implementation deed with our shareholders. The acquisition price of $2.175 billion represents 16.3x LTM EBIT and 13.7x LTM EBITDA, realizing significant value for Perpetual shareholders and comparing strongly to recent broker valuations. Completion will be subject to certain conditions, including regulatory approvals, an independent expert report confirming it's in the best interest of shareholders, shareholder approval, court approval and certain material adverse change and other customary conditions. In terms of the transition, the Perpetual brand will transfer to KKR as part of the transaction. Importantly, we've entered into a brand licensing agreement with KKR for the Perpetual Australian equities teams to continue to use the Perpetual brand for a period of up to 7 years. The ASX-listed parent Perpetual brand will rebrand as we move forward to become that new focused multi-boutique Asset Management business that we've talked about, and we expect that rebranding to occur by December 2025. A transitional services agreement has been agreed for a period of 18 months post completion, with the option of 2 6-month extensions. This is expected to provide sufficient time to deal with a material proportion of stranded costs. An estimate of those stranded costs will be included in the Scheme Booklet. I should say that while we are talking about a Scheme meeting in February and completion in February, we may well be able to have that Scheme meeting earlier in January, if we can. On that front, in terms of the timetable, along with our FY '24 results, we expect to provide shareholders with more detail on the estimated cash proceeds from the transaction. Following our AGM in October, we expect a Scheme Booklet to be sent to our shareholders. and targeting that scheme meeting for January '25, if we can, with completion in February. With that, I'll hand back to Tony.

Thanks, Chris. Just by way of summary, before we open it up to questions. I think as that slide shows, this is a compelling offer for Wealth Management and Corporate Trust. It provides a unique ASX-listed Asset Management business. And as we've said, it unlocks value for shareholders in terms of both the cash proceeds and the continued ownership in the Asset Management business, which is better positioned to improve performance in the medium to long term. And finally, I'd comment on the executive and the Board. The executive and the Board will focus on implementation in the coming months. We've taken the step of appointing Greg Cooper as the Deputy Chair to assist the Board. With the Asset Management business as I've said, that remains our focus as well as successfully implementing and completing the transaction. Rob Adams, Perpetual's Group CEO and Managing Director, has decided to retire on completion. As I say, in the ASX release, the Board is extremely appreciative of Rob's contribution to this group over the last 6 years. The Deputy Head -- just-appointed Deputy Chair will head the committee that will recruit the CEO for Asset Management. So we have before you, a very significant announcement for Perpetual, significant changes for the business, and the Board feels very confident that this is the right transaction. And our efforts will move to completion as soon as we can, given the complexity of the transaction itself. And with that, I'll hand back to Susie, and we'll open it up to questions.

Thanks, Tony. Thanks. Can we hand over to the moderator for questions, please?

[Operator Instructions]. Our first question comes from Kieren Chidgey of Jarden.

First question, just in terms of the outcome here. You've broadly stated you believe this is a superior outcome for shareholders relative to other alternatives. How are you able to conclude that's the case without being able to quantify net proceeds for shareholders at this point?

Who wants to take that?

I think in terms of what we've said in relation to net proceeds, we'll outline to shareholders in the August meeting what that is. We've analyzed the offer clearly against other offers that have come in and against other valuation metrics that we've used. And the benefit to shareholders, as I said, is in 2: it's in relation to the capital return that we've talked about, which will quantify and advise shareholders before they vote. But secondly, and importantly, the strengthening of the Asset Management business in terms of how it will be positioned and performed is another important part of what the interest, a Perpetual's shareholders' interest, is in Perpetual. In terms of the numbers themselves, as I say, that will be a matter that we will be much clearer on, and I'll ask Chris to perhaps speak a bit more about that.

The only thing I'd add there, Kieren, is while we aren't in a position yet to share with the market what those cash proceeds on a net basis are. We have done sufficient work to give the Board the information they need to have determined that this is a very strong proposal, after having had a very thorough process and after having reviewed a variety of different options for the portfolio. So we're very comfortable the Board is having the information it needs to make that determination.

Yes. I might -- it's Rob here. I might just sort of add to that. In terms of the process itself, it was an extremely thorough process. It looked at all possible options. As you know, these businesses are high-quality businesses, unique businesses and the interest level was extremely high, both domestically and globally. And through the assessment of the approaches and the participation of a variety of different high-quality organizations, it enabled us to compare -- allowed the Board to compare those options and to arrive at the best conclusion.

Thank you.

Can you just -- sort of just following up on that, unpack sort of segment what those key separation transaction costs are even if you're not going to quantify them at this point, but just confirm whether or not there is a material tax liability here given the cost base of Corp Trust business, in particular. Is that the main issue? And sort of what would be the maximum tax liability that could unfold here?

Kieren, the tax treatment for shareholders and the transaction will be set out in detail in the Scheme Booklet when it goes out. We will be seeking a class ruling from the ATO that will be issued to shareholders after the implementation and also a private ruling for Perpetual itself. As it relates to the costs that will be relevant as we get to net proceeds, we obviously have the transaction, the costs themselves associated with executing the transaction and the advice associated with that. We have separation costs that will -- and keep in mind here that we are having 2 businesses separate from the group to KKR, and the costs associated with seeing those businesses up to deliver to KKR on completion will be relevant. We also have -- there will be net debt adjustments, as you imagine, in a sale process like this to make sure that balance sheet, working capital, et cetera, are set up appropriately. But we're very comfortable on the separation and transaction costs that, given the nature of the separations that we're doing, that we are spending an appropriate amount of money on seeing these businesses up and delivering them to KKR. And of course, I should say as well that we will be paying down our debt facility, which, at 30 April, was about $770 million as well.

Next, we have Brendan Carrig from Macquarie.

Brendan Carrig from Macquarie. Just a question, maybe, Chris, for you, on the stranded costs. So at a group level, corporate costs sort of sitting at $20 million to $25 million in the corporate division. So have you given any sort of estimates as to what that number might be? And potentially what you could bring that down up to after reallocating in [indiscernible]?

Brendan, not today. We've done some work on that and are continuing to do the detailed work ahead of results, so we can give you an estimation of that. We take some comfort from the fact that we have an 18-month TSA that may extend for 6 months or 12 months. That period will allow us to appropriately manage the stranded cost profile down. I also make the point that, in terms of those corporate functions that sit in group today, a number of people in those functions will be moving across to the Wealth business and/or the Corporate Trust business. So as part of seeing those businesses up, they'll -- and I think you'll recall from our half year results that the process of devolving corporate functions to the divisions had already commenced. And so things like finance and some of the other core functions already reside in Corporate Trust and Wealth, but for areas such as Risk and Compliance, Operations and Technology, PACT and other elements of group finance, there will be a movement of resources across to those businesses. That will still leave a rump of stranded costs. And as I say, the TSA period, as we work through transitioning the remaining elements of the business to KKR, will allow us to manage those stranded costs out in an organized way.

Okay. And then the second one, just on the brand licensing agreement to retain the name, will it be a [ key ] Asset Management business? Is this a material cost? I guess the [ group ] side of the stranded cost, is this a cost that gets embedded into the business? Or doesn't really [indiscernible] too much?

Brendan, Rob here. Your line is breaking up a bit, mate, but I think I've got the thrust of...

Just on the stranded -- yes, on the brand licensing costs.

Yes, yes. It's no cost for the first 5 years and then it will be a market-based licensing fee for the sixth and seventh year if we determine we want to use it.

Our next question comes from Nigel Pittaway from Citi. Our next question comes from Lafitani Sotiriou from MST Financial.

I'm not sure if this is a joke, but are you guys here to tell us today to trust you with this deal and not provide a bunch of key information? But frankly, sorry, the market did trust you with the Pendal deal, and we saw how that worked out. So in case you're wondering, we don't trust you. So can you tell us what estimates were provided to the Board for the separation costs, the tax bill and the stranded group cost, which is key deal information, so that the market is fully informed on what this looks like. Because you've clearly got a number. You've done some estimates -- you provided it to the Board. Can you tell us what that number is?

Lastly, we've talked in the presentation about providing information on or before our results in August. Until we've done more detailed work, we want to make sure that we've got those numbers right before talking to the market.

But how can you be recommending a deal that you haven't even done the detailed work? There's got to be something sitting behind it. Like this is a joke, right? Like you're coming out to the market saying, "We think this is the best deal on the table," but you can't even tell us what it is. This is a big key information. It is actually a joke.

Well, thank you for the question. I mean I think the issue here is it's quite clear what the headline number is, and you calculate off that, the issues of the additional cost themselves.

Yes. We calculate off that, but we can't -- what are we calculating? How much is the tax bill? What is the separation cost? These are 101 for deals that are announced? And what is the stranded group cost? This isn't a big ask. You're actually at risk of not having a fully informed market. Your shares are trading, and you've got 3 key bits of information in relation to this transaction that you're not prepared to give to the market.

At this point, we're not in a position to do that, but we will do that as quickly as we can.

But going back to Kieren's point, how can you guys then be endorsing this transaction? Like how can it be both sides? You either -- you're not confident enough on the numbers to tell us, but you're confident enough to tell us that this is a good transaction, like is that a joke? Are you serious?

This is not a joke. And it is a serious proposal and recommendation, and we're at the first stage of providing...

It definitely isn't because you haven't given us the key information, right? So you clearly -- this isn't a good deal because you're clearly hiding some key information on it. Anyway, let me move to my second question. So you're selling the Perpetual brand, which is new. This is not what the other [ field ] is looking at. Can you tell us how much you value the Perpetual brand at in order to sell it? Can they compete? So at some stage, can KKR have equivalent products using the Perpetual brand? And what is the minimum time that they can actually -- if they sell, I guess, they don't sell it, what is the minimum amount of time that the Perpetual funds management business can hold that brand for?

Laf, It's Rob here. As I mentioned before, for the Australian equities team, we have use of that brand for a 7-year period or up to a 7-year period. The KKR is precluded from offering any form of similar public offer funds or institutional investment services in active Australian equities for that period. So that important team and that important set of capabilities has that protection for that period of time, which includes in event of a change of control as well.

[Operator Instructions] Next question, we have Andrei Stadnik from MS.

Can I ask the first question around [indiscernible] role of production for success. What kind of mine prime thinking? Also, what sort of pots you're looking with excessive investments.

Sorry, Andrei, your line was breaking out really badly there. I really couldn't get the question, I'm afraid. Opportunities of success, was that in Asset Management or -- sorry, I really couldn't get the question, sorry. Maybe try again.

I'll try again. Is that clearer?