Standard Life and Aberdeen AM agree £11bn merger
Standard Life and Aberdeen Asset Management have agreed terms for an £11bn merger, having revealed talks over the weekend.
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The nil-premium deal, which will create one of the largest active investment managers globally with £660bn of assets under management, will see Aberdeen shareholders own roughly a third of the enlarged company and Standard Life's the rest, with each Aberdeen share exchanged for 0.757 new shares.
Subject to shareholder approval, the merger is expected to close in the third quarter of 2017, with analysts expecting the transaction to complete as advertised with no competition issues.
The two companies will initially have an equal number of seats on the SLAAM board, with Standard Life chairman Sir Gerry Grimstone becoming chairman and Aberdeen's Simon Troughton deputy chairman.
Current chief executives of both parties, Keith Skeoch and Martin Gilbert, will become co-CEOs, with Aberdeen's Bill Rattray becoming chief financial officer and SL's Rod Paris chief information officer.
With Standard Life based in Edinburgh, some miles south of its partner's eponymous home, the companies have not yet agreed where the combined group will be headquartered.
Standard Life shareholders will still receive the proposed final dividend of 13.35p in May and Aberdeen investors will be entitled to receive an interim dividend of up to 7.5p for the six month period ended 31 March 2017, to be paid in June.
With the two companies confirming rumours on Saturday evening, there were reports that the merger would result in up to 1,000 jobs cuts as a result of jobs overlaps from a merged workforce of 9,000 as the pair are targeting cost savings of at least £200m within three years post completion of the deal.
Setting out their rationale in seven bullet points, SLAAM stated that the deal is expected to harness their complementary investment and savings capabilities; establish one of the largest investment solutions offerings; reinforce both SL and AAM's commitment to active management; create a group with strong brands and distribution; increase diversification and drive 'material' earnings accretion for both sets of shareholders.
Lloyds has agreed to defer any decision on removal of assets managed by Aberdeen until six months after the merger completion date; if it decides to remove assets after that point it will give at least 12 months’ notice.
Reaction
SL shares were up 7% to 405.6p while Aberdeen, having already risen 10% over the previous four weeks, were up almost 6% to 303.8p in the first few minutes of trading on Monday.
Analysts at Citi were positive on the outcome of the deal for Aberdeen, noting that it has struggled with 18 consecutive quarters of net fund outflows, relative investment performance issues and a lack of significant new drivers for fund gathering.
"But, a merger with Standard Life would alleviate many of these headaches," the said, but adding that underperformance of Aberdeen’s Global and APAC equity strategies remains a concern amid an increasingly competitive environment for active managers and highlighted "significant risk" that Aberdeen revenue could shrink over coming years, "perhaps sufficient to offset the planned cost synergies".
Jefferies stated that in the first instance, a nil premium merger means Aberdeen shareholders 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.
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, and that Standard Life brings some stability to Aberdeen, which has seen 15 quarters of consecutive outflows.
"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.
As well as offering a more stable base and offering opportunities for cost-cutting, the pair feel the clear need for scale in a market where active managers are feeling the pinch on fund charges from much cheaper passive funds.
"By targeting £200 million of annual cost savings, both companies will go some way to relieving some of that pressure on the bottom line," Khalaf said. "However that does unfortunately spell job losses for the combined group."
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, and 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, adding the £200m of cost cuts was "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."