Further Consolidation in Fund Space as Jupiter Buys Merian Global Investors
Jupiter Fund Management has sealed a defensive £390m deal to buy rival Merian Global Investors; it is paying £370m upfront for Merian (formerly Old Mutual Global Investors) – considerably less than the valuation of the business when it spun off in a £550m management buyout two years ago
The deal offers reassurance for Merian investors, but the cash and shares deal underlines the pressures on both fund management companies, which have seen significant outflows from their funds in the past year.
The deal makes Jupiter bigger and possibly stronger at a time when fund managers are under intense pressure from low-cost tracker funds to cut their fees
Merian’s key fund managers, including former chief executive Richard Buxton, smaller company duo Richard Watts and Dan Nickols, have all signed on the dotted and will own a similar stake to the 1% they owned in Merian, but without executive powers.
‘recent large-scale mergers and acquisitions in UK asset management have not proved to be a value-accretive event for investors’
Including a £20m earnout if targets are met and Merian’s net debt of £29m, the total cost of the acquisition for Jupiter is £419m, which is a lot less than the £550m the business was valued at when TA Associates backed the MBO from insurance giant Old Mutual.
The Boston-based private equity firm previously invested in Jupiter in 2007 when it spun off from Germany’s Commerzbank and sold out when it floated three years later.
TA is currently sitting on a loss, but will hope that rolling over its holding into a 16% stake in Jupiter will give it exposure to a bigger enterprise with better prospects; it will also gain a seat on its board.
Darius McDermott, managing director of Chelsea Financial Services told Citywire: ‘Jupiter has what many consider to be the market-leading multi-asset franchise in the UK. The firm also has strong performance in European and Asian equities as well as a popular strategic bond fund in the fixed income market.
‘In addition to the UK, Merian excels in global equities and also has a strong specialist offering in the shape of its gold and silver fund, managed by Ned Naylor-Leyland,’ he added.
By adding Merian’s £22bn AUM Jupiter will manage around £65bn and will help diversify the business; ‘substantial cost efficiencies’ should enable 13% to 15% annual profits growth from next year and give it total annual management fees of around £140m in 2020, the company said.
Operating profit margins could rise to between 50% and 60%, while keeping pay levels at their current level, compared with Jupiter’s current 43% margin, it added.
However, analysts have identified this as a defensive move as assets fall; two companies combining from a position of weakness, attempting to shore up businesses that were haemorrhaging assets.
Morningstar says that Merian has suffered outflows of £8.8bn since October 2018, with its Equity Absolute Return Fund shedding £6.1bn to now stand at £3.4bn of assets.
Jupiter itself has fared little better; the exit of star European equities manager Alexander Darwall triggered a £1.1bn outflow in the third quarter.
Citywire reported that Shore Capital analyst Paul McGinnis issued a cautious ‘hold’ note on Jupiter saying the risks and rewards were evenly balanced.
‘Unfortunately, recent large-scale mergers and acquisitions in UK asset management have not proved to be a value-accretive event for investors, with both Henderson’s merger with Janus and Standard Life’s takeover of Aberdeen failing to generate positive returns for shareholders and failing to arrest negative net flows.
‘Jupiter has reported seven consecutive quarters of negative net flows and, given the drop in assets under management at Merian since its creation, we assume flows have been negative here too,’ McGinnis said.
Numis Securities’ David McCann said: ‘Whilst we note that Merian (like Jupiter) appears to have had a tough time recently for flows (especially in the Gear product), we note that the price paid appears to reflect this, looks inexpensive and may be opportunistic in our view.’
‘should broaden the product mix whilst bringing together two culturally aligned firms with greater combined scale in our view’
‘We note that both businesses are similar on paper (both circa 90% retail client, circa 75% UK client), but have lower product overlap than might be anticipated. The deal, therefore, should broaden the product mix whilst bringing together two culturally aligned firms with greater combined scale in our view.’
Jupiter had previously avoided takeovers but its new chief executive Andrew Formica, who oversaw Henderson Global Investors’ purchases of New Star and Gartmore and its merger with Janus Capital, was expected to stay true to form.
Formica said: ‘This is an exciting acquisition that enhances our position as a leading UK asset manager, provides increased scale and diversification into attractive product areas, and creates stronger future growth prospects for the business.’
Merian chief executive Mark Gregory, will leave after the takeover, expected in July, said: ‘Jupiter is a great strategic and cultural fit with our business. It has a market-leading brand with a clear focus on high conviction, active asset management which is entirely consistent with our own.’
Merian shareholders will own 17% of the group after the deal; Refinitiv data says that Jupiter’s biggest shareholders are Silchester International 17%, Baillie Gifford 6.4%, M&G 4.9%, Aberdeen Standard Investors 4.7%, Sanderson Asset Management 3.8% and Vanguard 3.1%.
Jupiter is funding the deal with the issuance of 95 million new shares; existing shares gained 3% or 13p to 409.8p on the news