Talk of a higher takeover offer did not stop the Pendal Group Ltd (ASX: PDL) share price from slipping lower this morning.
The listed fund manager got a non-binding $2.4 billion bid from rival Perpetual Limited (ASX: PPT) yesterday, which UBS called "opportunistic".
This leaves room for Pendal to get a better offer price as recent transactions have shown that the first offer is not the last.
Looming bidding war for Pendal?
Remember the takeover tussle for Uniti Group Ltd (ASX: UWL) and Australian Pharmaceutical Industries Ltd (ASX: API)?
Despite the prospect of a higher offer, the Pendal share price dropped 1.5% to $5.21 in early trade. In contrast, the S&P/ASX 200 Index (ASX: XJO) gained 0.3%.
But given the 18% surge in the Pendal share price on Monday after the takeover offer was announced, the pullback won't worry shareholders.
Room for a higher takeover bid
There's no guarantee that the takeover will proceed. But UBS reckons Pendal is worth more than the $6.23 a share price that Perpetual is putting on the table.
Importantly, Perpetual's takeover offer is below UBS' 12-month price target of $7.20 a share for Pendal.
The offer also comes at a time when the Pendal share price is trading at a 38% discount (pre-bid) to its historical price-earnings multiple of 14.1 times.
"The bid appears opportunistic, noting the broader sell-off in asset managers and the widening PE gap between pure-plays (PDL 8.7x) versus diversified names (PPT 12.6x)", said the broker.
"We believe the bid undervalues PDL, with some scope for the offer to move higher and remain accretive to PPT."
Why the Pendal share price has been derated
There are a few reasons behind the underperformance of the Pendal share price that led to the takeover bid. Fund outflows and patchy investment performance are two factors. Pendal is also in the process of bedding down its US acquisition of TSW.
The acquisition won't put off Perpetual as UBS believes TSW's business is well understood by Perpetual.
Perpetual's merger with Pendal will also help the former diversify away from non-asset management businesses.
How much more can Perpetual offer for Pendal?
"With the offer valuing PDL at ~12.8x, below its long[1]term average of 14.1x we think the PDL board is unlikely to accept the current offer, but we see room for the offer price to move higher," said UBS.
"On our analysis, the deal becomes EPS neutral at a scrip ratio to 1PPT:6.5PDL implying ~$7/shr."
One also can't discount another bidder entering the arena given that M&A interest remains strong. The takeover offer for Pendal also validates UBS' view that the sector is too oversold.
