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Standard Life - Merger with Aberdeen Asset Management

Nicholas Hyett | 6 March 2017 | A A A
Standard Life - Merger with Aberdeen Asset Management

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Standard Life and Aberdeen Asset Management have agreed terms for an all-share merger of the two groups. Aberdeen shareholders will receive 0.757 new Standard Life shares for each existing Aberdeen share. Based on Standard Life's closing price on 3 March 2017 (the last business day prior to the date of the announcement) this values each Aberdeen share at 286.5p, and the company as a whole at £3.8bn.

Should the merger go ahead, Aberdeen shareholders will own approximately 33.3% of the combined group, with Standard Life shareholders holding the remaining 66.7%. Standard Life shares rose 8.9% following the announcement.

Our View

Standard Life has been transforming itself from life insurer to asset manager in recent years. That's stood it in good stead since the government turned the pensions market on its head, scrapping the requirement for pensioners to buy an annuity.

Meanwhile Aberdeen has been seen as a potential acquisition target for some time. With assets under management (AUM) of a shade over £300bn it is big, but no giant by global standards. In an industry where size matters, both to reduce average costs and increase cross-selling opportunities, that put it in the 'buy or be bought' category.

The merger solves Aberdeen's issues of scale while also propelling Standard Life into the big league, creating the UK's largest asset manager and aiming to deliver £200m in annual cost savings. With £660bn in assets under management (AUM) the group would also be the second largest in Europe.

Aberdeen's specialism in emerging markets should mean that its funds fit well alongside Standard Life's more vanilla products, although there will inevitably be some cross over. For Aberdeen the opportunity to sell funds through Standard Life's distribution channels, particularly to retail customers and through corporate pension platforms, should provide routes to new customers.

From Standard Life's perspective the deal has the added advantage of reducing its reliance on the huge Global Absolute Return Strategies (GARS) fund. The £25bn portfolio, has seen significant net outflows recently, as rival targeted return funds have delivered better performances.

Cost savings are likely to be the major driver of earnings growth in the short term. However, Aberdeen has suffered 15 successive quarters of outflows and Standard Life has also been struggling to hold on to assets. Stemming those outflows, or attracting new money, is key to the group's longer run future.

Both companies currently offer generous prospective dividend yields and the combined group expects to maintain its progressive dividend policy, growing from a base of 19.82p for the 2016 financial year although there are no guarantees.

The deal is subject to approval by shareholders and competition authorities.

Full Year Results (24 February 2017):

Standard Life saw Assets Under Administration (AUA) increase 16% over the year to finish at £357.1bn. However, this was driven by market performance, with the group experiencing modest net outflows of 2.6bn - largely as a result of mature books of business.

The group's growth channels delivered a strong performance, with AUM up 20%. Within that Institutional and Wholesale AUM grew 11%, while Workplace and Retail AUA grew 33% (boosted by the acquisition of Elevate). Fee based revenue from growth channels grew 10% to £1.2bn (versus £1.7bn total fee revenue).

The group's cost to income ratio fell one percentage point to 62%, with the group continuing to target a rate below 60%.

The group has set aside £175m for customer redress relating to non-advised annuity sales.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.