Diversified investment manager Perpetual Ltd ((PPT)) has finally made a move on its global expansion plans with an eagerly anticipated bolt-on acquisition. The acquisition of Trillium, a US-based asset manager specialising in International Environment, Social and Governance (ESG) investment for $54m up front of will be fully funded from available cash with a four-year earn-out.
Brokers generally consider this acquisition makes sense as it kicks off the company’s expansion in the US, with other deals likely to follow. Bell Potter notes ESG is the a new “buzz” segment, highlighted by the $5.5bn in funds under management Trillium has been able to secure.
The high-growth ESG sector, which Perpetual states has grown 75% over the past six years in the US and 53% over FY19 in Australia, is a potential growth area, supported by a commitment to invest in distribution not only in the US but also in Australia. Hence, this is a small way to expand abroad and the deal is expected to be accretive in the first year.
Perpetual has not provided a flow or performance track record but has signalled the Trillium funds have positive net flows and significant capacity for growth.
More Detail Required
While on the surface this is a sound move, Bell Potter points out there are some details that need fleshing out. While there are earn-outs in place which are expected to help retain key staff, no earnings or acquisition multiple was announced.
Further information is expected when the company reports the first half result on February 20. Meanwhile, the broker not one of the seven monitored daily on the FNArena database, has a Hold rating and $41 target.
Based on a review of Trillium’s key funds, UBS believes revenue margins are likely to be in the order of 50-60 basis points, implying revenue of around $30m on the December 2019 asset base, or around 5.6% of Perpetual’s revenue on a pro forma basis. While operating costs were not disclosed, as a general assessment UBS believes the deal could add $3m to underlying net profit.
Credit Suisse expects the investment that Perpetual’s plans, including building out a US distribution team along with increased marketing expenditure and expansion of new products globally, will reduce earnings accretion in the early years although benefit the outer years.
Establishing a presence in a new segment of the market or geography typically take several years, the broker adds, while upgrading FY21-22 estimates for earnings per share by 2% to allow for the acquisition and an additional $1.5m in investment.
There is upside risk to these forecasts if Trillium can grow assets under management from this juncture and Credit Suisse also believes the acquisition should alleviate concerns about whether attractive deals can be found and closed.
More Acquisitions To Come
This could be the first of a string of small bolt-on acquisitions, providing potential for future, even larger, deals. After Trillium, Citi estimates balance-sheet capacity of around $200m for acquisitions, although points out the company remains open to all funding options and could resort to an equity raising if it finds a deal which will be transformational.
Perpetual had flagged, back in November, it was looking at three offshore managers and Trillium represents one of the three. Citi notes the other two include a multi-capability US manager running US and global equities and a EU-based manager with a focus on liquid alternative strategies.
As the core business is still suffering from growth challenges and material outflows from equities, as well as a sub-optimal investment performance, the broker expects more acquisitions will need to be forthcoming.
While welcoming the acquisition, Morgans requires further evidence of management’s successful execution before turning more positive. This is the company’s first attempt at establishing offshore representation so significant execution risks exist.
The broker, looking at the numerous funds Trillium manages, finds the performance somewhat underwhelming, as most funds are just beating or are under-achieving relevant benchmarks, albeit restricted to the ESG universe. Arguably, therefore, selling the company’s products to new investors may prove challenging until the performance improves.
The database has one Sell rating (Macquarie, yet to comment on the acquisition) and six Hold. The consensus target is $40.20, signalling -2.9% downside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.0% and 5.6% respectively. Targets range from $36 (Macquarie, Morgan Stanley) to $43.28 (Morgans).
