KKR's Perpetual Bid May Spark Australian Funds Mergers

Kohlberg Kravis Roberts & Co.’s offer of as much as A$1.75 billion ($1.73 billion) for Perpetual Ltd. may spur consolidation among Australian firms overseeing the world’s fourth-biggest pool of managed funds.

“If you want to buy wealth management assets whilst the market is in a bit of a trough, now is the time to do it,” said Angus Gluskie, who manages $325 million at White Funds Management Pty. “Their timing might be pretty good.”

KKR’s offer yesterday came after Perpetual’s shares tumbled almost two-thirds from a 2007 peak. The proposal may stoke interest in rivals such as Platinum Asset Management Ltd. And Axa Asia Pacific Holding Ltd., said Gluskie, who bought Perpetual stock after National Australia Bank Ltd. announced a A$13.3 billion bid for Axa Asia last year. That offer failed last month.

The bid is “a strong positive for the sector, highlighting the inherent longer-term value in the Australian funds management industry,” Richard Coles, an analyst at Royal Bank of Scotland Group Plc in Sydney, said in a report yesterday. “Whilst this bid could arouse speculation of possible counterbids, we think there is a fairly low probability.”

Biggest Takeover

If successful, the Perpetual deal will be the country’s biggest takeover of an asset manager since National Australia Bank agreed to buy MLC Ltd. in April 2000. That transaction came a month after Commonwealth Bank of Australia agreed to buy Colonial Ltd. in the biggest ever acquisition of an asset manager in March 2000 for A$8.2 billion in stock.

Departing Managing Director David Deverall has overseen a recovery in Perpetual’s earnings in an economy that skirted last year’s global recession. Perpetual’s net income in the year to June 30 more than doubled to A$90.5 million, from A$37.7 million a year earlier, helped by investment returns.

Growth is expected to strengthen in the industry that manages Australia’s A$1.35 trillion pool of managed funds after more than doubling in the past 10 years. The government has proposed increasing employers’ compulsory contributions to employee pensions to 12 percent from 9 percent.

“There are only a handful of these intermediate-sized asset managers” left in Australia after the nation’s biggest banks expanded into fund management, Sydney-based Gluskie said.

Share Slide

Perpetual shares tumbled 63 percent through Oct. 15 from a record in May 2007. After surging 22 percent yesterday, the stock today dropped 1.5 percent to A$37.24 as of 10:12 a.m. in Sydney trading. Australia’s benchmark S&P/ASX 200 Index was up 0.3 percent at the same time.

Photographer: Sergio Dionisio/Bloomberg

The logo of Perpetual is displayed atop the company's headquarters in Sydney. Close

The logo of Perpetual is displayed atop the company's headquarters in Sydney.

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Photographer: Sergio Dionisio/Bloomberg

The logo of Perpetual is displayed atop the company's headquarters in Sydney.

Investment manager Challenger Financial Services Group Ltd. gained 1 percent, following yesterday’s 3.9 percent climb. Fund manager IOOF Holdings Ltd. rose 1.3 percent.

France’s Axa SA and AMP Ltd., Australia’s second-largest asset manager, are continuing talks on whether to make a bid for Axa Asia Pacific and are making progress, the Australian newspaper reported yesterday, without saying where it got the information.

Aussie Parity

KKR’s offer comes even as the Australian dollar surged to parity with the U.S. currency on Oct. 15 for the first time since foreign-exchange controls ended in 1983. The nation’s currency has jumped about 20 percent since May 25, driving up the cost of the nation’s assets for foreign investors.

Private equity firms pool money from investors to take over companies, financing the purchases mostly with debt, with the intention of selling them later for a profit.

KKR’s offer follows National Australia Bank’s failed A$13.3 billion bid for asset manager Axa Asia Pacific, which the bank dropped last month after regulators blocked the agreed deal.

National Australia Bank’s offer for Melbourne-based Axa Asia Pacific had valued its Australian and New Zealand operations at 19.5 times estimated 2010 earnings, National Australia Bank said when it announced the bid in December. Perpetual on Oct. 15 was valued at 13.6 times earnings, 29 percent below its average of 19.2 times over the past five years, according to data compiled by Bloomberg.

Axa Asia Pacific is valued at 17.1 times earnings and Platinum shares are trading at 20.6 times profits.

Legg Mason

KKR, founded by buyout pioneers Henry Kravis and George Roberts in 1976 and listed on the New York Stock Exchange this year, acquired a $1.25 billion stake in Legg Mason Inc. in 2008 to help the Baltimore-based money manager replenish capital as it struggled with subprime-linked losses.

Perpetual was founded in Sydney in 1886 by a group that included Edmund Barton, who became Australia’s first prime minister in 1901. As of June 30, Perpetual managed more than A$27 billion in investment funds, administered A$210 billion, and advised on more than A$8 billion of investments, according to its website.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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