The Netwealth Group Ltd (ASX: NWL) share price is edging lower on Tuesday morning.
In early trade, the investment platform provider's shares are down 0.5% to $17.42.
Why is the Netwealth share price edging lower
The catalyst for the fall in the Netwealth share price this morning is news that the company has made a non-binding indicative proposal to merge with smaller rival Praemium Ltd (ASX: PPS).
According to the release, the company has offered one Netwealth share for every 11.96 Praemium shares plus a cash consideration of $50 million. The latter reflects the expected net proceeds from the sale process of Praemium's international operations.
Based on the Netwealth share price of $17.94 at the close on 27 October (the day prior to its proposal being made), this implies a base consideration of $1.50 per Praemium share.
This represents a premium of 29% to the Praemium share price on 27 October and a 20% premium to its last close share price.
The base offer values Praemium at $785 million and the transaction at an enterprise value/EBITDA multiple of 55x. Judging by the performance of the Netwealth share price today, the market appears to believe this could be a touch on the expensive side.
What is the rationale for merging?
While the market may have given the news a lukewarm response, management sees many reasons to merge. The release explains that Netwealth expects the transaction to enhance its platform with further scale and accelerate the development of specialist capabilities to capture the long term growth potential of the expanding market for wealth management services. It also sees significant cost and revenue synergies.
Overall, management believes the transaction is compelling and would create substantial value for both sets of shareholders. It would also lead to the creation of the largest independent wealth management platform in Australia by net flows and the leading platform for wealth advisors and investors across all wealth segments.
Combined, the Netwealth-Praemium merged entity would account for $72 billion in Australian platform funds under administration and more than $22 billion in non-custodial assets.
Netwealth's Joint Managing Director, Matt Heine, commented: "Netwealth is confident that the Proposed Transaction (if implemented) would create a very strong value proposition for existing and future clients and for shareholders of both groups. The Proposed Transaction would ensure that the combined group can continue to lead the industry in net funds flow, technology and client service in what is currently a competitive and rapidly changing platform and advice landscape."
"Praemium shareholders would have meaningful equity in the combined group and benefit alongside Netwealth shareholders from the strategic benefits as well as the cost and revenue synergies that would arise from the merger," he added.
What now?
The release explains that Praemium responded to the proposal on Monday, advising that while they acknowledge the benefits of the merger, the proposed transaction does not represent a value it would be willing to recommend to shareholders.
The Praemium share price is up 18% to $1.47 on the news.
