Standard Life's (SL.) shift towards asset management has been years in the making: the division has accounted for more than half of its total assets under administration since 2014. So a proposed merger with Aberdeen Asset Management (ADN) is not too much of a strategic surprise, even if it caught the market unawares.
Under the terms of the £11bn all-share deal, Standard Life shareholders will own a two-thirds stake in the newly enlarged group, with Aberdeen holding the remainder. Based on the life assurer's share price of 378.5p on the day prior to the announcement of the deal, shares in Aberdeen are valued at 286.5p each - offering no premium to the latter's holders.
The new group would have around £660bn in assets under administration, making it the UK's largest active asset manager and second in Europe. Around £200m in annual pre-tax synergies are expected three years after completion of the deal. Simplifying and combining platforms and reducing third-party service providers is expected to produce just under a third of these. Rationalisation of distribution and central offices is also planned. Scale is increasingly important for asset managers, which face competition on pricing from passive products.
Analysts at Numis have upgraded their target price for Aberdeen from 260p a share to 345p a share, citing management's expectations of "material" earnings accretion and assuming 10 per cent in joint cost savings.
Emerging markets specialist Aberdeen reported its 15th consecutive quarter of net outflows last month, as investor sentiment towards its end markets has weakened. But given this cyclical low for the manager, the lack of a premium will be harder to take.
Shore Capital analyst Paul McGinnis said the possible merger represents a Hobson's choice for Aberdeen shareholders: "Either accept a nil premium takeover or risk a material dividend cut, possibly as soon as the interim results in May, due to the weak capital situation."
Management of both companies point to the diversification benefits of the deal, by geography and client base. Aberdeen has a more developed presence in the US and Asia, as well as strong links to institutional clients, to complement Standard Life's retail distribution platforms.
Aberdeen chief executive Martin Gilbert will be co-chief executive alongside Standard Life chief Keith Skeoch. Aberdeen has already received non-binding letters of support for the merger from major shareholders, including Lloyds (LLOY) and Mitsubishi UFJ Trust and Banking Corporation, which hold an aggregate 27 per cent stake in the asset manager.
