Analysts see earnings uplift and risks from Standard Life-Aberdeen merger

After Standard Life and Aberdeen Asset Management revealed they had agreed terms on a potential £11bn merger, City of London analysts mostly came out in support of the deal, some suggested a bid battle could ensure and others highlighted risks.

The proposed merger, which will produce a company with assets under management north of roughly £660bn, is expected to conclude in the third quarter of 2017.

Given the company's confirmation of synergies at £200m, higher than its initial estimates, Citi saw the deal adding 15%-20% earnings enhancement for both companies.

The deal should "alleviate many... headaches" for Aberdeen, having struggled with 18 consecutive quarters of net fund outflows, relative investment performance issues and a lack of significant new drivers for fund gathering.

For Aberdeen shareholders, Jefferies stated that in the first instance, a nil premium merger means they are no better off than at last close.

"However, on the basis of our existing standalone forecasts and potential dividend uncertainty, we had a 221p price target. The merger underpins a current share price of 287p, removes dividend uncertainty and could benefit from cost synergies."

Looking at potential scale of cost-cutting, a target for savings of 10% of the combined group would equate to £32m of post-tax gain for ADN, which would boost its earnings by 13% compared to Jefferies' 2017 forecast.

Analysts at Olivetree, while also noting the meaningful overlap between the two shareholder registers with the top 75% of Aberdeen holders own 25% of Standard Life, said the deal was very much a progression of Standard Life’s ongoing move from life assurance to asset management, but that it was a "transaction that it is hard to get excited about, either for positive or negative reasons".

"Aberdeen’s net outflows will probably be the key metric to watch throughout the life of the deal, although given the outflows are somewhat the underlying driver for the deal it is hard to argue that it presents a meaningful risk to Standard Life’s intentions to complete," Olivetree said.

Olivetree saw the £200m of cost cuts as "an achievable figure".

"Expect to see consolidation in the asset management industry continue, Henderson/Janus and Standard Life/Aberdeen are by no means unique in the pressures they are facing from passive management strategies currently. Rationalisation of costs across this space is entirely sensible and likely to see other transactions announced in the coming months."

Numis' analyst David McCann suggested there is a small chance this announcement could flush out other takeover interest in Aberdeen.

"Whilst a hostile approach would be very unusual in a people business, this deal appears to have been announced very early stage and as such it is possible that other interested parties may simply have not yet come forward," he said, highlighting Blackrock, JP Morgan, Capital, PIMCO, Amundi, Natixis, Invesco, T.Rowe, Legg Mason, AMG, Sumitomo Mitsui, Ameriprise,
AllianceBernstein, Standard Life, Prudential, Credit Suisse, Mitsubishi, Macquarie and Aviva as those who are the most likely to have possible interest.

Analyst Laith Khalaf at Hargreaves Lansdown observed that the merger was a marriage of the old and the new, both in terms of the companies’ heritage and their main areas of strength.

"In particular, Aberdeen’s emerging markets focus dovetails well with Standard Life’s capabilities in developed markets, though there are considerable areas of overlap between the two fund groups, particularly in multi-asset, fixed income and property strategies," he said.

Risks and challenges

But operational challenges remain, Citi cautioned, despite the more diversified base of assets and extensive distribution network.

"Underperformance of Aberdeen’s Global and APAC equity strategies remains a concern, and we continue to see an increasingly competitive environment for active managers, including in the EM space, with more passive strategy alternatives now available to investors."

Mulling whether Standard Life is getting a good deal, Citi suggested the targeted £200m of cost cuts could be offset by continued outflows at Aberdeen, which has seen several quarters of outflows due and its exposure to emerging markets making made its performance somewhat volatile.

Citi's standalone forecast is for £33.5bn further net outflows from December 2016 to September 2019, 11% of year-end AUM, while if Lloyds decides to withdraw its insurance AUM as well in 18 months’ time, analysts estimate around £100bn further outflow risk, albeit at lower margin.

"We see significant risk that Aberdeen total revenue FY16 of £1,007m could shrink over coming years, perhaps sufficient to offset the planned cost synergies," Citi said.

Numis said other risks could include some SL shareholders viewing the deal terms as being more favourable for ADN shareholders and want the deal terms revised to be more favourable from their perspective; that some clients of companies on either side have significant change of control/ownership structure clauses which could lead to significant asset withdrawals ; that there could be a competition commission referral; that the deal could be derailed by negative attention from local politicians and employment pressure groups.

Olivertree saw no problem with the transaction closing as expected in the third quarter of 2017, with no competition issues likely.

"Given the degree of competition and the presence of major players in this space, it likely that the deal will have a fairly easy path through the anti-trust regulator," analysts wrote.

From a funds under management perspective, Standard Life and Aberdeen come in at numbers five and six in the UK market and the combined group will come nowhere near to the size of Blackrock and L&G so Olivetree foresees a straightforward approval process.