Cantor Fitzgerald: Standard Life and Aberdeen merger ‘defensive and cost driven’
Keith Baird, financial services analyst at Cantor Fitzgerald, looks at what the merger between Standard Life and Aberdeen Asset Management means for the two companies, as well as the wider industry.
The proposed merger, recommended by both boards, would create a group with £660bn in assets, among the largest globally. Standard Life would have two thirds and Aberdeen one third of the group by value but management control is to be split equally. The deal is all-share and nil premium, with an exchange ratio reflecting Friday’s close. While it enables both firms to diversify, it looks defensive and cost driven in the context of familiar industry headwinds. We estimate 5-10% earnings accretion subject to risks of staff and revenue retention. We retain our HOLD recommendation.
- A combined £660bn in assets – Standard Life and Aberdeen Asset Management have announced a proposed merger which would create a group with £660bn in total assets, putting it among the largest globally. It will be all-share with a nil premium and is recommended by Aberdeen. The share exchange ratio is 1 share Aberdeen for 0.757 Standard Life share which exactly reflects Friday’s closing prices. This would give Aberdeen shareholders one third of the combined group and SL two thirds. Despite the size disparity, the board is to have equal representation from each side and the new group will (initially?) have co-CEOs in Skeoch and Gilbert. The deadline for the deal is deal is 1st April
- A defensive merger – The rationale for the deal must be diversification for both Standard Life and Aberdeen. SL has had success in growing its institutional business but has problems with GARS and mature insurance books. Aberdeen has a large emerging markets business which has struggled. Given the headwinds faced by the asset management industry from passive investing, pricing and regulatory pressures, this looks like a defensive deal. Both firms have issues which have been reflected in their share prices. The announcement refers to synergies and improved cash flow which will come from the cost side where the combined cost based is c.£1.8bn. We estimate 5% plus in cost savings. The fit between the two businesses looks reasonably complementary but there will be a risk of revenue and staff attrition to offset savings on costs.
- Similar valuations – The respective market values are Standard Life £7.48bn and Aberdeen £3.77bn, with £11.3bn combined. The shares are similarly valued with SL shares trading on a FY17E PE of 12.8x consensus earnings and Aberdeen 13.4x FY18E. If we assume 5-10% earnings accretion in the medium term, if the deal goes ahead, it should be overall positive.
- Risks – The principal risks are client sentiment and net fund flows, market indices, investment performance, currency, staff retention and regulation.
Keith Baird | Financial Services Research | 020 7894 8070 | firstname.lastname@example.org