Pendal’s acquisition doubles the US footprint
Global fund manager, Pendal Group (ASX:PDL), has just announced the strategic acquisition of US-based Thompson, Siegel & Walmsley (TSW). The acquisition delivers material scale to the existing US operations and is expected to be double-digit earnings accretive in the first 12 months.
PDL announced the acquisition of TSW for US$320 million (A$413 million) along with the release of its first half 2021 result. The acquisition doubles PDL’s addressable market in the US and delivers towards the stated FY25 funds under management (FUM) growth target of 50 per cent.
Encouragingly, PDL’s interim result showcased improving fundamentals within the core business and a positive medium-term growth outlook. PDL enters the second half of FY21 with 4.5 per cent higher FUM and a meaningful rebound in investment performance which should support flows and potential for performance fees.
Established in 1969 (coincidently around the same time as PDL was formed) and headquartered in Virginia, TSW primarily operates value-oriented, long-only equity strategies (US and international) with US$23.6 billion (A$30.5 billion) of FUM.
TSW has a longer-term track record of outperforming within the value category which has done it tough for several years now, although value has staged a solid comeback since October last year, coinciding with the arrival of the vaccine news and further boosted by stimulus policies. Recent business momentum has been positive, underpinned by a strong year of performance and a string of big client wins. With 86 per cent of FUM outperforming the benchmark on a 1-year basis (compared to PDL at 83 per cent) and perhaps a renewed tilt towards value, flow prospects for TSW appear bright, in our view.
The strategic rationale for the acquisition appears sound. TSW is highly complementary to PDL’s existing US business with almost no overlap of investment strategies or clients and with differentiated distribution channels, clients and consultant relationships. PDL’s existing international growth-oriented strategies will be balanced with TSW’s value-oriented product range, offering substantial diversification benefits.
Further, TSW brings immediate scale to the combined group, doubling PDL’s US market FUM (to US$45 billion) and somewhat reducing uncertainty around achieving the ambitious five-year growth target. Targeting 50 per cent growth implies A$138 billion FUM by FY25 (from A$92 billion as at the end of FY20), or A$46 billion incremental. So TSW effectively covers two-thirds of this growth target.
PDL has been investing significant resources ahead of this anticipated step up in growth, focused mainly around expanding the global distribution footprint and building a scalable and efficient global operating platform. Going forward PDL should be able to leverage TSW’s professional infrastructure, reducing some of the required investment.
Financially, the deal is compelling with management expecting double-digit EPS accretion before any synergies in the first full year of ownership. The purchase price implies 7.6x EBITDA (1H21 annualised, excluding synergies) and will be funded from a combination of existing cash, debt and a A$190 million equity placement (priced at A$6.80 per share with the new shares issued equivalent to 8.6% of the existing share capital base). The balance sheet remains conservatively geared (0.9x gross debt/EBITDA) post completion which is anticipated to occur during the September quarter 2021.
We think valuation remains attractive for the growth potential of the business. The stock is trading on 14x FY2 EPS (20 per cent discount to the broader market) with a 6 per cent yield.
The Montgomery Small Companies Fund owns shares in Pendal Group. This article was prepared 14 May 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Pendal Group you should seek financial advice.
Dominic Rose is the Portfolio Manager of the Montgomery Small Companies Fund. Dominic joined Montgomery in August 2019 after spending thirteen years specialising in smaller companies in portfolio management and equities research. Most recently, Dominic was a Portfolio Manager and Senior Research Analyst at MHOR Asset Management in Sydney for three years. Prior to this, he ran Deutsche Bank’s Small Caps Equity Research Team in Sydney for six years. He was also previously Head of Research at Foster Stockbroking.
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