Money always goes to money, they say, so perhaps another potential merger in the wealth management sector, revealed today, is no surprise.
Following on from the £11bn merger which formed new FTSE 100 player Aberdeen PLC () last week, FTSE 250-listed PLC () today announced it is in exclusive talks with management-owned financial services provider Smith & Williamson over a possible all-share merger.
READ: Rathbone Brothers confirms £2bn all-share merger talks with financial services provider Smith & Williamson
The statement from Rathbone – which has £36.6bn of assets under management (AUM) and a market value of £1.4bn – confirmed weekend press reports.
Smith & Williamson – which is 33% owned by Canadian firm AGF – has AUM of £19bn and is valued at £600mln, so a possible merger would create a £2bn company.
Consolidation has been a consistent theme in the wealth management industry as companies struggle to maintain margins in the face of rising regulatory costs and downward pressure on fees.
Period of consolidation
Ryan Hughes, head of fund selection at , comments: “The news of a potential merger between Rathbones and Smith & Williamson is the latest evidence that we are in a period of consolidation in the asset management industry.”
He added: “Both of these business have remained at the periphery of the large asset managers and struggled to gain major traction, with many of their strategies remaining sub-scale.”
“While there may be wider benefits from these two businesses coming together given that they do much more than just asset management, the ability to build greater scale has to be seen as a key opportunity as active managers look to take the fight back to the passive giants.”
Hughes concluded that with markets at elevated levels and passive managers such as and Vanguard taking ever greater market share, there are likely to be further opportunities for mid-tier asset managers to come together and find synergies to cut costs.
Synergies and cost-cutting eyed
David Madden, market analyst at CMC Markets UK) said: “Given the tighter regulation within financial services, mergers can offer a way forward for companies like Rathbone Brother and Smith & Williamson as synergies and cost cutting can be introduced.”
Madden also noted that Rathbone Brothers’s share price has been in a solid upward trend since July 2016, and it is very close to the record high of 2,840p, so a fairly subdued market reaction today was probably likely, especially given all the usual caveats given by the firm to a deal proceeding from the merger discussions.
In early afternoon trading, Rathbone shares were 1.2%, or 32p higher at 2,802p.
Analysts at Numis Securities retained a ‘hold’ rating and 2,500p price target on Rathbone shares in the wake of today’s announcement, noting that the discussions have been going on for some time.
But , in a note to clients, they said: ”Consolidation has been a recurring theme across the wealth management industry and if successful, we believe this deal could offer real value to shareholders given Rathbones good track record of consolidating past acquisitions.”
And analysts at Liberum Capital pointed out: “Strategically, the deal would seem to make sense in our opinion, particularly given Rathbones has been struggling to drive organic growth much beyond 3% of opening FUM in recent years.”
But, they added: “In a sector that is consolidating rapidly we see greater upside for investors elsewhere, and suggest positive read-across to , which trades at a +20% P/E discount to Rathbones with a yield of 4.0%.”