Shares in both Standard Life and Aberdeen Asset Management jumped this morning after the two FTSE 100 companies confirmed they have agreed terms on a merger to create a UK fund management giant.
Standard Life shares rose 5.6 per cent on confirmation of the deal this morning, implying a market value of £7.9billion while Aberdeen’s climbed 4.6 per cent to imply a market value of £3.9billion.
The merger comes as fund managers face a squeeze on their fees from the rise of passive investing and financial regulators pushing for lower costs and more transparency.
Some £660billion in assets would sit under the management of the new company if the deal goes through
Both Aberdeen and Standard Life are major players in the actively-managed fund world, with the pair of Scottish firms running more than 100 open-ended funds between them and a sizeable number of investment trusts.
A combine Aberdeen and Standard Life would look after an estimated £660billion of investors’ money and be one of the world’s largest fund managers.
Senior analyst at personal investing firm Hargreaves Lansdown Laith Khalaf sees the merger as a ‘marriage of the old and the new’ in terms of the companies’ heritage and their main strengths.
‘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.
Shares in the two FTSE 100 companies themselves are also held widely by individual investors.
The deal is to be carried out as a share exchange, which means shares in the new merged company will be given to Aberdeen shareholders in exchange for their stock, rather than paid for in cash.
Under the terms, Aberdeen shareholders will be entitle to 0.757 newly-created shares in the merged company for each one share they hold.
Based on this exchange ratio and the closing price of 378.5p per Standard Life share on Friday, 3 March, the last business day before news of the deal broke, the merger values each Aberdeen share at 286.5p.
If the deal goes through on these terms Aberdeen shareholders will collectively own approximately 33.3 per cent of the merged company with Standard Life shareholders owning the other 66.7 per cent.
Aberdeen shares have climbed above that level today to 299.5p, while Standard Life shares are trading at 399.6p, at 1pm.
The companies are targeting £200million in savings from combining their businesses. These will in large part come from what are called ‘synergies’, which usually result in job losses.
Synergies refer to situations where both companies have people or systems fulfilling the same role, and therefore once merged they no longer need them all and redundancies are made.
The companies have already confirmed backing for the deal with some of their big shareholders.
They said they have received ‘non-binding statements of support’ from MUTB (Mitsubishi UJF Trust and Banking) and Lloyds, which together own approximately 27 per cent of Aberdeen’s existing shares.
The deal is being carried out through what is known as a ‘scheme of arrangement’ which means only 75 per cent of shareholders must vote in favour for it to go through.
With a standard takeover offer the acceptance rate can vary, but typically 90 per cent of shareholders in the target company must agree so that the bidder can force the remaining holders to sell and take total control.
Standard Life chief executive Skeoch will become co-CEO with Aberdeen’s Gilbert
Financial services analyst at broker Cantor Fitzgerald Keith Baird sees the proposed £11billion merger as a defensive, cost-driven deal, prompted by the growing threat from passive investing, pricing pressure on active fund management and regulation.
‘The proposed merger, recommended by both boards, would create a group with £660billion in assets, among the largest globally,’ said Baird.
‘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 per cent earnings accretion subject to risks of staff and revenue retention. We retain our ‘hold’ recommendation.’
‘The rationale for the deal must be diversification for both Standard Life and Aberdeen,’ Baird continued.
‘Standard Life 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.’
CEO of Standard Life Keith Skeoch and CEO of Aberdeen Martin Gilbert will become co-CEOs of the combined company. Bill Rattray of Aberdeen and Rod Paris of Standard Life will become CFO and CIO respectively.
Investment banks Goldman Sachs, JP Morgan Cazenove and Credit Suisse are advising the companies on the proposed deal.
Laith Khalaf said: ‘Standard Life brings some stability to the table for Aberdeen, which has seen 15 quarters of consecutive outflows, and which will also now benefit from distribution through Standard Life’s workplace pension and wrap platform.
‘Aberdeen meanwhile offers Standard Life a quick route to the big boy’s table by almost doubling assets under management.’