Abrdn Bank acquires £1.5bn ‘no brainer’ by Interactive Investor

Engraved in the glass window in front of the company’s Edinburgh headquarters formerly known as Standard Life Aberdeen is a single word: Abrdn.

When the 197-year-old company decided to reinvent itself by removing vowels in 2021, the move was met with widely ridiculed. But according to chief executive Stephen Bird, it is a provocative plan to modernize a company that has struggled to find a foothold nearly five years after a lackluster merger.

“We fully expect to get it,” Bird, who has held the position since September 2020, told the Financial Times. “Good brands get noticed. Big brands start a conversation. “

However, the performance recovery of one of the UK’s largest wealth managers will take longer than the loss of mail. Bird’s Deciding in December to buy retail investment platform Interactive Investor for £1.49 billion in cash is his biggest bet. The transaction is expected to close in the second quarter of 2022 and still needs to be approved by Abrdn shareholders.

Abrdn management believes Interactive Investor, the UK’s second largest fund supermarket with under £55 billion in assets under management, is key to building a third leg in a lucrative segment that will secure The manager’s future is in trouble.

Bird and Sir Douglas Flint, president of Abrdn, envision creating an investment group that can serve more clients throughout their financial lives, rather than continuing to focus on institutional businesses and asset management has been around for a long time.

“Agreement II is absolutely central to the survival of the CEO and chairman,” said one analyst. “They are burning through a huge amount of capital. . .[when] what was there was the child scope. They need to demonstrate that they need these three separate lines of business, and I don’t believe this is the case. ”

After Standard Life and Aberdeen Asset Management merged in 2017, their combined market capitalization was more than £11 billion. Today it is £5.3 billion. Valuable shares in two joint ventures in India, which Abrdn is gradually selling off, are now worth around £1.4 billion. The stake in Phoenix, the UK insurer and Abrdn’s biggest client, is worth around £900 million. Abrdn announced on Thursday that it will also reduce its stake in Phoenix from 14.4% to 10.4%.

Abrdn, which manages £532 billion, has suffered from annual net outflows since 2016. Lloyds Banking Group in 2018 issued a mandate to manage £109 billion for its insurance business. The bank’s Scottish Widows Insurance Company, then the largest client of the wealth management company, opposed the merger.

This tie created duplication and a confusing corporate structure, exacerbated by subsequent acquisitions.

Former co-directors Martin Gilbert and Keith Skeoch have now stepped down from executive roles, as have many senior executives and some star managers, while former cash funds have flattened out.

Gilbert, co-founder and chief executive officer of Aberdeen from 1983 to 2019 and one of the architects of the 2017 deal, admits it “didn’t go as well as I hoped”.

“I think people underestimate the technology aspect [of mergers] across geographies and platforms,” he said. “The normal office is quite easy, fund managers are also easy to integrate, but the technology is difficult and time consuming.”

Abrdn Office in Edinburgh
Abrdn has suffered from net outflows every year since 2016 © Jonne Roriz/Bloomberg

Retail is one of the hottest segments of the investment market as workplace pension schemes become less generous and traditional managers get caught up in a price war to compete with those in the industry. passive giants like BlackRock and Vanguard.

Richard Wilson, executive director of Interactive Investor, who has pledged to continue after the deal closes, said the fact that the platform will operate as a stand-alone unit helps reduce the risk of failure. “All the risks on the edge of cultural mergers and systems mergers, that’s not part of the mix,” he said.

The two companies have committed that Interactive Investor will still provide clients with a wide range of funds and will not prioritize Abrdn’s services over competitors.

But critics say the price tag for Interactive Investor is too expensive for a business where synergies are unclear and opportunities to cross-sell products are limited.

“We don’t really understand Agreement II. Are they trying to turn the business into an asset manager? Is it effective? ” asked the top 10 investors in Abrdn. “The acquisition is quite expensive for what it is. The markets don’t believe in the goals they’ve set. ”

Gilbert, who remains a shareholder, is more active. “I am a more valuable player, I am not sure I have the courage to buy [Interactive Investor] because of its valuation, but I think it’s a good deal and an engine for growth. ”

Abrdn saw an opportunity to sell its wealth management services – such as financial advice and estate planning – to Interactive Investor’s group of 400,000 clients.

“We need to earn the right to be on any platform, including the ones we own,” Flint said. “The advantage is that the feedback loop you get on any investment topic is very compelling.”

Bird also defends the deal price. Buying Interactive Investor instead of having it listed is a “no-brainer” thing, he said. “If we let it go for an IPO, and then auction it off, we’d pay a premium of 30 to 35 percent off the list price.”

Bird said he would consider making other acquisitions as “additional” purchases, but not on a similar scale.

The company took a majority stake in real estate logistics manager Tritax in 2020.

“We will be in a payback position,” says Bird. . . One way would be through a progressive dividend policy but we are also open to other ways to do so. “

Since coming to Abrdn, Bird – who once led Citigroup’s consumer banking and Asia-Pacific businesses but had no specialized knowledge of fund management – slashed the company’s dividend and sold or closed several secondary enterprises in the Nordic countries and Indonesia.

The company reported a 77.2% increase in adjusted pre-tax profit for the first half of 2021 to £113 million, compared with a loss of £498 million in the same period a year earlier.

“You would never expect us to solve the market capitalization problem in 12 months, but you would expect us to take actions that help the business grow sustainably,” he said.

Flint first came up with the idea of ​​Bird joining Abrdn in pints of Scottish beer and fish and chips at an Edinburgh pub in February 2020. The two first met while working in Asia. , when Bird was still at Citi and Flint was the chairman of HSBC Bank.

The inclusion of an executive with no expertise in wealth management caught many by surprise. But Bird says it’s time to turn Abrdn from a fund manager into a one-stop shop for every investor need.

“There are dyed skeptics in wool property management and they are like: we just see you as a property manager. If we only look at ourselves [that way], we will not create a path for the future,” he said.

Additional reporting by Harriet Agnew

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