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Aberdeen Asset Management - Merger receives approval

Nicholas Hyett | 22 June 2017 | A A A
Aberdeen Asset Management - Merger receives approval

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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.

Aberdeen shareholders will own approximately 33.3% of the combined group, with Standard Life shareholders holding the remaining 66.7%.

The deal has now been approved by shareholders and the Competition and Markets Authority. Subject to final regulatory approvals, it is expected to complete on 14th August.

Our View

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.

Acquirer 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.

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.

Cost savings are likely to be the major driver of earnings growth in the short term. However, Aberdeen has suffered 16 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 this will be achieved.

First half results

A combination of rising markets and favourable currency moves helped first half net revenue grow by 10.6% to £534.9m. This growth, combined with the completion of the £70m p.a. cost saving initiatives, helped Aberdeen deliver earnings growth of 19.9% in the period. The interim dividend is held flat at 7.5p per share.

The shares rose 3.2% on the news.

Assets under management (AUM) dipped £4bn to £308.1bn during the half. A £15.1bn tailwind from markets, performance & foreign exchange was more than offset by outflows and business rationalisations, including the withdrawal from core and core plus mandates in the US fixed income division.

The group saw outflows of £13.4bn in the first half. Outflows in Q2 were £2.9bn, much lower than the £10.5bn in Q1, which included two large redemptions totalling £4.2bn.

These redemptions contributed to equity fund outflows of £8.6bn in the half (H116 £9.8bn). Fixed income and multi asset flows continued to be impacted by structural outflows from insurance clients. The group remains wary of geo-political issues bringing continued uncertainty, but says emerging market equities have shown encouraging progress in the second quarter, and that overall, new business is being won at higher margins than is being lost on outflows.

Aberdeen's cash conversion remains strong, with operating cash flow of £152.9m, helping its net cash position improve from £401.4m to £498m, with the headroom above regulatory capital requirements increasing to £75.2m.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.


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