Shareholders in IOOF Holdings Limited (ASX: IFL) will be asked to tip an additional $550 million into the wealth manger to fund the $975 million acquisition of Australia and New Zealand Banking Group's (ASX: ANZ) pensions and investments business largely under the OnePath umbrella. The remainder of the cost will be made up by new debt facilities.
The total sale price represents an estimated 25x FY17 NPAT in what is a transformational deal for IOOF Holdings that had a market value of just $3.4 billion until today's news.
IOOF claims the purchase price represents 15.5x adjusted net profit, or 9x adjusted net profit including anticipated cost savings that can be extracted as a result of the deal.
On its calculations (that may prove optimistic) IOOF expects the deal to be mid-single digit earnings per share accretive in FY 2019, with expectations that EPS accretion will eventually increase to around 20%.
These assumption are on IOOF's belief that it can find $65 million per year in"pre-tax cost synergies" from FY 2021 with "further potential for enhanced revenue". A lot then rides on the ability to find cost savings across areas like technology, distribution, platforms, aggregation and product offerings.
The deal will catapult IOOF into the big league of advisory and wealth planning businesses as number two in Australia by advisor numbers and funds under administration.
The move also solidifies IOOF's pivot into the fee-skimming financial advice space that has proven lucrative enough for specialist aggregators and practitioners over recent years.
For ANZ shareholders the deal also looks good as the price looks full given this is a well regulated and capital-intensive space that's never going to shoot the lights out.
Outlook
IOOF and its business model is not my idea of a great investment and it now has a lot of work ahead to justify the near $1 billion price tag for what is essentially just a couple of financial advisory businesses.
Currently, I'd prefer to back the profit-lifting strategy of ANZ Bank under its new leadership team and expect its management team will be delighted to have offloaded its OnePath business and aligned dealer groups at such a price.
