The proposed acquisition by Aberdeen Asset Management of Scottish Widows Investment Partnership (SWIP) would, if successful, rebalance its asset mix, reduce its dependence on global, emerging market and Asian equities, and bolster its fixed income and UK equities offering, Fitch Ratings says.
“We believe the transaction would be positive for Aberdeen's franchise strength and asset mix (GBP201.7bn assets under management at end-August 2013). SWIP had an estimated 30 per cent (GBP42bn) of AUM at end-December 2012 focused on UK equities, and 44 per cent on sterling fixed income and cash, areas in which Aberdeen has so far been relatively underrepresented. The SWIP sterling money market fund (GBP15bn) is the second-largest sterling MMF, dwarfing Aberdeen's.
“This more balanced asset mix, coupled with more stable AUM from SWIP's exposure to in-house entities of its parent, Lloyds Banking Group, should ultimately translate into greater earnings stability. But this would be at the expense of the overall AUM margin as SWIP's average fees are about 3x lower than those of Aberdeen. Earnings stability is particularly important as we expect margins on AUM at European fund managers to come under more pressure next year and beyond as competition intensifies and sources of higher fee-generating business decline.
“We understand the transaction would be funded through issuance of new Aberdeen shares and deferred cash payments conditional on performance. This should enable Aberdeen to sustain balance-sheet strength, one of the key rating factors in Fitch's investment manager and alternative funds criteria. Nevertheless, balance-sheet discipline would have to be reassessed after the transaction and in view of Aberdeen's commitment to a progressive dividend policy.
“Aberdeen has a good acquisition track record, having reached its present global position via typically equity funded transactions. But the SWIP deal would be larger than any Aberdeen has made before, exposing it to integration risk. These challenges may include exposure to client churn as there may be some overlap with SWIP's customer base.
“The transaction's impact on Aberdeen's overall creditworthiness would also depend on the post-acquisition strategy and scope for synergies. The acquisition may expose the group to some concentration risk, as a large part of SWIP's AUM is likely to be on behalf of in-house entities, although these assets are likely to be more stable on average. We will comment on the impact of the potential transaction on Aberdeen's rating (A-/Stable) as details emerge.
“We see some scope for further consolidation in European asset management, with a focus on transactions that contribute to asset mix optimisation. But the proposed deal is unlikely to lead to an avalanche of similar ones as there is a limited pool of candidates, and integration risks and prices can prove obstacles.”