Perpetual

Perpetual has made a $213m takeover bid for The Trust Company. The offer comprises 0.1495 shares in Perpetual for each share in The Trust Company, plus 22 cents in cash, making a total of $6.39 per share – a 9% premium to the pre-bid close price. The price represents a multiple of 16 times The Trust Company’s expected earnings per share for the year to 30 June of 40.1 cents.

The deal trumps a previous offer for The Trust Company by Equity Trustees, worth $5.94 at last nights close, and has been unanimously recommended by The Trust Company’s board, in the absence of a superior proposal.

The deal will increase funds under advice in Perpetual Private by 53% to $13.4bn and will add about $1.3bn, or 5%, to Perpetual Investments’ funds under management. It will also extend Perpetual’s Corporate Trust capabilities.

Perpetual expects to achieve $15m a year in synergies, with the deal having a positive impact on earnings per share from the 2014 financial year onwards.

We switched from Hold to Avoid on Perpetual following last year’s full-year result (see 4 Sep 12 (Avoid – $26.88)) but, given that this is a high-quality business that we’d love to own at the right price, under our fresh approach to recommendations, Avoid is no longer appropriate.

The share price is up 53% since then, but the business’s value has also increased. The Transformation 2015 restructuring is delivering cost savings ahead of schedule, as we highlighted on 4 Mar 13 (Avoid – $40.06), and funds under management have increased – thanks to the rise in markets but also, crucially, to a stabilisation in fund flows (in the three months to 31 March, there was a net outflow of just $0.1m).

The stock is on a price-earnings ratio of 22, based on forecast earnings for the year to June 2013, falling to the high teens for 2014 as further restructuring benefits are realised. That looks about right. We’d think about buying at below $25 and would Sell above $50. HOLD.