In the next six months, the sale of BT’s superannuation and Panorama platform business has the potential to transform the market in Australia depending on just who buys the assets.
At this stage Westpac is planning to sell the business in two stages. First the $46 billion under management in its basic superannuation business which is well under way with mainly trade buyers in the market.
Jewel in the crown
Next comes the jewel in the crown, the Panorama platform, which has 18 per cent of the Australian market and $110 billion under advice with a range of financial buyers at the front of the queue for the highly prized asset.
There is a chance both assets will be sold together depending on price but the bank and its advisers Morgan Stanley see most value coming from splitting the assets.
One of the potential Panorama buyers is JC Flowers which is headed in Australia by former Westpac boss David Morgan who acquired BT back in 2002 at a fraction of the original asking price when sold by Deutsche bank.
He knocked back $2.4 billion in 1999 from Deutsche before acquiring the better positioned assets for $950 million in 2002 from Principal, with the now CFS chair Rob Coombe the boss of the business.
Expensive asset
Panorama may be where value lies in the deal but it is also an expensive asset to run which is why the market is expecting a financial buyer like KKR, JC Flowers, Carlyle or Apollo to win the deal.
Westpac has had myriad issues with the platform which has consumed hundreds of millions of dollars a year in technology investments. But it is a known quantity and far better to buy an established asset than start from scratch.
Platforms dubbed by some as the Netflix of the industry are attractive because, while it’s a competitive space, there is more leverage in how you run the business with the aim being as broad a distribution as possible in the advice market.
Performance test issues
The BT super business is being sold as very much a trustee sale with the emphasis on getting the best deal for the company’s 600,000 members.
Westpac is the last of the big banks to sell but the ultimate trigger was APRA’s ruling last year that BT had failed its performance test set over the past seven years. The Trustees figured they had no alternative but to sell.
Some argue the performance test is arbitrary and in the past seven years has clearly favoured equity investors and so-called risk-on investments. A fund which is administering a more conservative stance may be meeting investor needs but fails the APRA tests.
This realisation also underlines a potential wild card in the sale which is the fact that APRA must ultimately approve the buyer. The fact Westpac and others are racing to sell shows the APRA consolidation policy is working but the test is whether the new partner is a ‘good’ fund.
At first instance this is a decision for the BT trustees but ultimately it falls to APRA.
The folk at Westpac prefer to use the term “merger partner” which also underlines what some see may be a limited number of buyers.
Potential buyers
An industry fund wanting to add scale may be interested but another retail fund is a real chance given it can pay for the asset from its profits. A not-for-profit fund would have access to existing profits but a not-for-profit fund may find it hard to justify spending funds for the sake of scale.
LGIA Super paid $45 million for Suncorp’s super assets and its 137,000 members so there is some precedence for not for profits being acquirers.
Suffice it to say there are several ways in which the sale can happen including a transfer of assets to the merger partner which is a little more complex than it sounds given individual tax and investment choices. (In spite of on-going CGT relief.)
Scale matters
The issue of scale is also more complicated. Scale is important but economies of scale are more important.
In theory the more funds under management the cheaper the product but this depends on what and how many products are offered and mass is not the same as economies of scale.
A simplified product range is considered key to keeping costs down.
This said, the offer of an immediate lift of $46 billion under management is a huge prize.
New regulations
New Government regulations, like stapling, have made it harder to attract new funds and it is also expensive to advertise.
A quick glance at the stock market tells you why Panorama is considered the jewel in the crown.
Listed assets like Hub 24 and Netwealth are trading at price-earnings multiples of 213 and 73 times forecast earnings respectively. That alone shows the value of an asset which is not subject to the myriad rules overhanging superannuation.
Platforms provide efficient vehicles for wealth advisers to pick the right products for their clients. If the ability to provide efficient distribution to the broad advice market is the reason for platforms, history has shown wealth assets were ultimately not attractive for the banks.
The banks found it difficult to manage the variable performance the sector provided against the ongoing return on equity of 62 per cent for existing home loans and 34 per cent on new loans.
Then came the Royal Commission and bank reputations were trashed in large part because of problems in their wealth management businesses.
New regulations on super were yet another blow.
Who will buy it?
Just who will buy BT is the next question. Not-for-profit funds are the stars of the sector and if $60 billion is considered the line in the sand for a mega fund then BT ‘s $46 billion would get you plenty of the way there.
It would also go further to satisfying trustee concerns, but some contacted expressed no great desire to chase an asset like BT. Insignia (The old IOOF) is said to be still working through the integration issues with MLC and One Path.
Its stock price is trading at less than half its January 2020 highs which tells you the market would probably balk at another deal.
Still, it’s a quality scale asset with a long list of potentials including AMP, Russell, Mercer and industry funds including AustralianSuper have not played down speculation of its interest.
The BT tyres are certainly worth kicking.
