May 10, 2017 / 11:55 AM / 3 months ago

Standard Life’s honey pot is a shrinking prize

Thomas Buberl, CEO of French insurer AXA, gestures as he speaks during the company's 2016 annual results presentation in Paris, France, February 23, 2017.Charles Platiau - RTSZYS5

LONDON (Reuters Breakingviews) - Standard Life’s honey pot is a shrinking prize. Even as the asset manager merges with rival Aberdeen, its flagship fund, Global Absolute Return Strategies, is eroding. That makes the tie-up look less sweet for Aberdeen shareholders. Fortunately, they were already getting better than might have been expected.

Fund-manager mergers can be turbulent even in a calm market, but Standard Life’s nil-premium deal with Aberdeen has come at bad time. Its GARS fund lost 2.8 billion pounds in the first quarter alone after leaking 4 billion pounds in 2016. It has underperformed its benchmark for much of the last year.

If it continues, that could change the economics of the deal. Standard Life doesn’t break down how much operating profit it makes from GARS, but UBS analysts reckon the multi-asset division in which GARS sits makes up to 20 percent of the group’s total. Imagine a drastic scenario where GARS lost enough of its funds to erode all that profit. Its fair value would fall by a fifth. Re-cutting the deal on that basis would give Aberdeen shareholders just below 39 percent of the merged entity, rather than 33 percent. They would also get an extra share of the cost savings, which in total had a present value of about 1.6 billion pounds, worth 86 million pounds.

GARS’s problems may not be terminal. Even though it lost funds last year on a net basis, it still drew over 10 billion pounds of new money. Standard Life has other charms, like experience in helping pension funds and other clients match their liabilities. Its fund management business has recently seen stable margins and, excluding GARS, good performance.

Aberdeen shareholders are getting a good deal anyway. Their half share of the board is bigger than they would deserve in a simple nil-premium merger. Aberdeen itself had experienced 15 quarters of outflows when the deal was announced. Even if that originally made some Standard Life investors nervous about the merger, they now have every reason to push it through.

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