Aberdeen moves one step closer to Scottish Widows deal

20 November 2013   Category: News, Global, United Kingdom   By Toby Garrod

Aberdeen Asset Management announced on November 18 the proposed acquisition of Scottish Widows Investment Partnership (SWIP) from Lloyds Banking Group, subject to regulatory approval.

The transfer of various businesses and funds in exchange for a 9.9% shareholding (valued at around £550 million (US$886 million)) in Aberdeen also provides a valuable platform for a long-term strategic relationship with the Lloyds Banking Group.

The addition of SWIP’s approximately US$211 billion of asset under management will result in Aberdeen becoming the largest listed independent asset management business in Europe with $521 billion under management.

“The acquisition combines Aberdeen and SWIP’s strengths across fixed income, real estate, active and quantitative equities, investment solutions and alternatives,” the firm said in a statement.

Commenting on the Acquisition, Martin Gilbert, chief executive of Aberdeen, said: “This transaction is significant for the long-term prospects of Aberdeen in a number of ways. It strengthens our investment capabilities and adds new distribution channels; the acquisition of SWIP adds scale to our business across a range of asset classes; and it also introduces a strategic relationship with Lloyds Banking Group. We are confident that this transaction will deliver considerable additional value to our expanded client base and this will therefore benefit our shareholders.  I am delighted to welcome Lloyds as a major shareholder in the Aberdeen group and we look forward to working with them to deliver value through this new strategic relationship.”

Fitch Ratings said in a report published October 28 that the transaction would be positive for Aberdeen's franchise strength and asset base. SWIP had an estimated 30% (£42 billion) of AUM at end-December 2012 focused on UK equities, and 44% on sterling fixed income and cash, areas in which Aberdeen has so far been relatively underrepresented. The SWIP sterling money market fund (MMF) (£15 billion) 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, said Fitch, though this would be at the expense of the overall AUM margin as SWIP's average fees are about three times lower than those of Aberdeen.

Earnings stability may be particularly important, as Fitch expects 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.

Balance-sheet discipline would have to be reassessed after the transaction and in view of Aberdeen's commitment to a progressive dividend policy, said the report.

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.