19th October 2010: KKR’s Perpetual Gambit

KKR‘s $A38-40 unconditional bid yesterday for fund manager Perpetual Investments may revive Australia’s M&A market.

Tony Boyd observes in today’s Australian Financial Review (‘No longer perpetually waiting’, 19th October 2010, p. 60):

Perpetual is a classic takeover target for private equity. Its chief executive is on the way out and his replacement is yet to be named. Its financial performance has been lacklustre for several years. It has high costs that can be cut quickly and it had assets that can be sold relatively easily. Also, its balance sheet is relatively ungeared now that the Perpetual Exact Market Cash Fund has passed the worst of its valuation problems.

The AFR‘s media coverage focuses on several factors: (1) the exit of chief executive David Deverall as a timing issue;  (2) the Australian Government’s regulatory changes and the prospects of regulatory arbitrage as another timing issue; (3) the ‘showstopper’ role of Perpetual’s equities team leader John Sevior and the possibility of “shadow equity”; and (4) the possibility that KKR may merge Perpetual with Legg Mason and sell-off the private wealth management business and other assets.

Meanwhile, Steven M. Davidoff of The New York Times assesses 11 M&A deals announced in early October and the prospects for an upswing in M&A activity in 2011. Davidoff notes:

“. . . the small value of these transactions shows that private equity is still firmly stuck in the lower middle market. The availability of credit will help, but targets are also likely to drive hard bargains and shareholders to rebel against low pricing . . .  This will limit private equity’s ability to find bargains in sizable transactions where there is more room for activism.”

There’s still time to watch those Sir James Goldsmith videos.