IOOF in three-way battle for Trust

It is sometimes argued that Australian companies are well placed to expand in Asia because they carry light political baggage: Australia's lack of notoriety in the region makes them less controversial acquirers of assets. So the theory goes.

A similar informal rule applies in Australia's financial sector. Financial giants find expansion avenues blocked, as NAB discovered in 2011, for example, when it tried and failed to take over AXA Asia Pacific. Smaller financial fish like IOOF swim clear of the competition regulator's takeover net. Growth by acquisition is easier for them - and with his latest expansion attempt, a $203 million bid for The Trust Company, IOOF chief executive Chris Kelaher is again positioning his group as an alternative to a takeover that has met regulatory resistance.

In 2011 he offered IOOF as a remedy for concerns the Australian Competition and Consumer Commission had about NAB's proposed $13 billion takeover of AXA.

The ACCC opposed the takeover partly because it would deliver control of AXA's new funds management platform, North, so IOOF and NAB announced that IOOF could buy North from NAB, with fund management mandates attached.

The ACCC believed that North would be less powerful in IOOF's hands than in either AXA's hands or the hands of AXA's other suitor, AMP. It nixed the NAB takeover again, NAB withdrew, and AXA fell into AMP's hands: under AMP's control North has grown, but not spectacularly.

This time Kelaher is acting unilaterally, and turning a battle for control of The Trust Co into a three-sided contest.

It began in February when another trustee services company, Equity Trustees, launched a share-exchange offer that valued The Trust Co at $5.28 a share, or about $177 million.

Equity Trustees pressed on with its bid despite being spurned by The Trust Co's board, but in May The Trust Co announced that it was endorsing another, larger suitor, the Perpetual group. Perpetual also offered shares, but the bid value was higher at $6.39 a share, and it was also prepared to pay out up to $60 million in cash.

Equity Trustees came back a week later with a sweetened bid that it said valued The Trust Co at $8 a share. Synergies of $15 million that the merged trustee group could extract were worth more to The Trust Co's shareholders than synergies of $15 million promised by Perpetual, it argued, because the Equity Trustees share-exchange bid would deliver 62 per cent of the merged company to The Trust Co's shareholders, compared with only about 8 per cent in a merger with Perpetual.

The Trust Co's directors re-endorsed Perpetual's offer late in July, after receiving a report from Ernst & Young that identified only $7.5 million of merger synergies in a merger with Equity Trustees, compared with $14 million in a merger with Perpetual.

On August 1 however, regulatory risk reared its head. The ACCC reached a preliminary finding that Perpetual's takeover of The Trust Co could harm competition in the trustee sector.

IOOF had quietly conducted due diligence on The Trust Co in May, around the same time as Perpetual, and on Tuesday, with the other suitors in the open, its June-year results in the bag and Perpetual's regulatory hurdle evident, it proposed a share swap acquisition that valued The Trust Co at $6.34 a share.

It also topped Perpetual by setting aside $100 million for a cash alternative of at least $6.03 a share: another 39¢ is available in both cases from dividends the Trust Company "may wish to declare", it argued.

Kelaher is edging Perpetual on price and, as he did in 2011 when he proposed buying the North platform from NAB, he is presenting IOOF as the key to a regulatory door that is closing.

Perpetual is already Australia's biggest trustee services provider, with funds under Trustee administration of about $264 billion, about 52 per cent of the market. A takeover of The Trust Company would lift its share to about 72 per cent or $367 billion, enough to raise ACCC concerns.

IOOF's funds under supervision are only about $32.6 billion or 6.4 per cent of the industry. Its trustee market share would be about 25 per cent if it bought The Trust Co, not enough to worry the ACCC. The regulator might, in fact, see the market as better balanced.

The contest has run for more than half a year, and with trustee services in demand, as self-managed super expands, for example, it may develop further.

If The Trust Co's board decides that IOOF's proposal is superior, Perpetual will get three days to match or beat it. It may do so on price. Whether it can do so on the regulatory front is unclear.

IOOF could then re-bid, and The Trust Co has also kept its dialogue with Equity Trustees running. Since mid-August the two companies have been conducting mutual due diligence and, like IOOF, Equity Trustees is off the ACCC's radar. It has trustee funds under supervision of $27.6 billion. But it probably needs to develop a cash alternative to stay in the hunt.

mmaiden@fairfaxmedia.com.au