Australian wealth manager Perpetual has called off talks with private equity firm Kohlberg Kravis Roberts & Co over a $1.7 billion takeover saying the approach undervalued the company, knocking its shares down by nearly 15 percent.
KKR made an indicative bid of A$38 to A$40 per Perpetual share in October, eyeing a slice of the $1.2 trillion Australian wealth management sector. It was only willing to raise that slightly after looking at limited data, sources said earlier this month.
The Australian wealth management industry is among the few growing parts of the country's financial services sector, thanks to compulsory private pension schemes leading to several deals including the latest $13 billion takeover offer of AXA Asia Pacific by AMP .
Perpetual, founded in 1885, called the initial offer low and said it would now end all discussions with KKR after it failed to get an acceptable price.
A successful offer could have led to further consolidation in the world's fourth-largest wealth management industry but investors said KKR will likely remain in the market for other Australian wealth management assets.
KKR's offer valued Perpetual at about 22 times forward earnings compared to 18 times for AMP's offer for Australia and New Zealand assets of AXA Asia Pacific.
The takeover premium is gone out of the share price and no other bidders are likely to come in, said Simon Burge, fund manager at ATI Asset Management. Add to that uncertainty over the new CEO. Only when a new head is appointed will we know the direction of the firm.
Perpetual has been looking for a new chief executive since David Deverall decided to quit in June after seven years at the helm. Perpetual did not give a reason for his decision but said Deverall will stay on till a replacement is found or at least till March 2011.
The company said it was still in the process of selecting a new chief executive.
SHARES FALL MOST IN TWO YEARS
Perpetual, which has a huge retail shareholder base of up to 70 percent, saw its shares jump by a fifth since the KKR bid and the stock ended at A$37.01 on Friday, valuing the firm at A$1.63 billion.
The stock closed at the day's low, dropping 14.8 percent to A$31.54, a level just above where it was trading before KKR's offer. The fall also marked it worst daily decline since Oct 29, 2008.
The Board confirms that KKR will not be conducting any due diligence on Perpetual and does not anticipate any further discussions with KKR in relation to the proposal, Perpetual said in a statement.
KKR said it had been unable to arrive at a mutually acceptable agreement with Perpetual but had been satisfied with the level of access and information received.
For KKR, Perpetual adds to its lost bids in Australia, where PE firms have also been hurt by a tax ruling that says gains from asset sales by PE firms will be taxed as income.
KKR lost a bidding war in July for hospital owner Healthscope to rivals TPG and Carlyle this year and has been scouting for opportunities ever since.
Fund managers say KKR may look at other asset managers including IOOF Holdings and Challenger but given rich value expectations and tax issues in Australia, it could look elsewhere in Asia where growth is faster.
In an attempt to comfort shareholders after the bid was called off, Perpetual reaffirmed its earnings forecast for an underlying profit of A$35 million to A$40 million in the six months to December.
KKR was advised by Credit Suisse , Nomura <8604.T>, Barclays and BKK Partners. Perpetual was advised by Goldman Sachs .
(Additional reporting by Megan Davies in NEW YORK)
(Editing by Balazs Koranyi, Lincoln Feast and Muralikumar Anantharaman)