Confirmation that IOOF has cut a deal with National Australia Bank and AXA Asia Pacific to take the North platform for what is effectively nothing will do much for its relationship with NAB and little for the competitive landscape.
The competition watchdog decided yesterday to let the NAB-AXA political hot potato go through to the keeper until after the election. To this end it released NAB's proposed enforceable undertaking to the market for consultation, with a decision due on September 9.
The Australian Competition and Consumer Commission yesterday invited submissions from industry participants but the feeling is the ACCC has boxed itself in by narrowly focusing on the impact of the merger on retail investment platforms for investors with complex investment needs.
NAB now must satisfy 13 concerns and the deal will be done - assuming the treasurer, whoever that is in two weeks, does not intervene and reject the deal.
It explains why AXA's share price bolted to close 5.4 per cent higher, NAB's ended flat after being lower for most of the day and IOOF's jumped 4 per cent.
In April, the ACCC knocked back the original merger proposal on the basis it lessened competition in retail investment platforms. NAB had lobbed a bid on December 17 to acquire AXA APH for $13.3 billion and sell its Asian assets to French parent AXA SA.
NAB then set about finding a buyer for AXA's North platform to pacify the ACCC. Nobody wanted to buy it because anybody can buy the DST technology off the shelf. Then IOOF and its wheeler-dealer chief executive Chris Kelaher, who has more platforms than he can poke a stick at, decided the North platform was special.
And it is. The economics of the deal is shrouded in mystery. However, from the outset it will be earnings per share accretive for IOOF and "not material" from a financial aspect.
From IOOF's perspective, it is a master stroke. If the deal goes ahead, IOOF will effectively get paid a few million dollars a year for a minimum of three years for the privilege of getting the AXA-NAB deal across the line.
Second, and possibly even more importantly, it puts IOOF in NAB's world. If it ends up with the North platform, IOOF will rent distribution for a period of time, and the platform - which will include IOOF's own products - will be distributed via NAB's dealers.
The deal is structured so that IOOF acquires the North platform and provides platform administration services to AXA for the North products for three years. After that, the $1.4 billion funds under management will transfer to a merged NAB-AXA.
But from the perspective of increasing competition in financial services, this deal will not do it.
According to Rainmaker, IOOF would jump two ranking places to No. 6 with 4.5 per cent of the market while the NAB-MLC-Aviva-AXA group, without North, would still rank No. 2 with 20 per cent market share. Westpac-BT would be No. 1 with 29 per cent. In the platform market overall, Rainmaker estimates the combined NAB group would control almost 25 per cent of the market, which is one-third more than the next player.
The ACCC's focus should never have been on reduced competition among retail platforms for investors with complex needs. The real focus should have been on distribution, in particular aligned distribution. Less than 10 per cent of financial advisers use the North platform.
What made the deal unpalatable to so many was the domination of the banks and their control of most of the life insurance market and most other financial products.
AXA shareholders want the deal to happen. The takeover is at a hefty premium to the current share price and, if the deal doesn't go through, AXA investors will be left with a major shareholder, AXA SA, which holds 54 per cent of AXA Asia Pacific, which clearly wants out.
A note from Credit Suisse yesterday said AXA's stock price, which remains below NAB's all-cash offer price of $6.43, was sparking worries by NAB's major shareholders that it may be paying too much to acquire the target company. It said if the share prices fell further, NAB's board would have no choice but to renegotiate the price of the acquisition.
It is no doubt a question that will be raised at today's third-quarter results update for NAB.
NAB's shareholders have made it clear from day one, December 17, that they did not want the deal to proceed. The share price has tanked accordingly, leaving NAB the worst performer of the big four banks.
Despite this, its chief executive, Cameron Clyne, has persisted, and it looks as if his persistence might have paid off.
Frequently Asked Questions about this Article…
What exactly is the IOOF North platform acquisition and why should everyday investors care?
IOOF has struck a deal to acquire AXA’s North platform as part of the wider NAB–AXA transaction. IOOF will provide platform administration services for at least three years, receive a few million dollars a year under that arrangement, and the $1.4 billion of funds under management on North will transfer to the merged NAB–AXA group after the service period. For everyday investors this matters because it affects who administers and distributes platform products (including IOOF’s own products) and may change how North products are offered through NAB’s dealer network.
What is the role of the ACCC in the NAB–AXA–IOOF deal and what is the approval timeline?
The Australian Competition and Consumer Commission (ACCC) is reviewing the NAB–AXA merger and the proposed remedies, including the IOOF arrangement. The ACCC released NAB’s proposed enforceable undertaking for consultation and invited industry submissions, with a formal decision due on September 9. The article notes the ACCC previously rejected the original merger in April and that NAB now must satisfy 13 concerns; there is also a window for the treasurer to intervene before the deal completes.
Will the IOOF acquisition of North increase competition in investment platforms?
According to the article, the deal is unlikely to materially increase competition. Rainmaker estimates IOOF would move to about 4.5% market share (No. 6), while the combined NAB–MLC–Aviva–AXA group would still be No. 2 with roughly 20% and Westpac–BT would stay No. 1 with about 29%. Overall the combined NAB group would control almost 25% of the market, so the transaction doesn’t significantly alter the market concentration.
How does the deal affect distribution and financial advisers?
The article highlights that the real competitive concern is distribution. IOOF acquiring North would put IOOF into NAB’s distribution network — North products would be distributed via NAB dealers and IOOF would ‘rent’ that distribution for a period. However, less than 10% of financial advisers currently use the North platform, so the article argues the ACCC’s focus on platform competition may miss the larger issue of aligned distribution and bank dominance.
What are the immediate market reactions for AXA, NAB and IOOF shares?
On the day covered by the article, AXA’s share price jumped about 5.4% after the developments, IOOF’s shares rose about 4%, and NAB’s shares finished flat (despite being lower for most of the day). The article also notes ongoing investor concerns that NAB may be paying too much for AXA, which has weighed on NAB’s share price over time.
Is the IOOF deal financially important for IOOF’s earnings?
The article states the deal will be earnings-per-share accretive for IOOF from the outset but describes the financial impact as “not material.” IOOF is expected to receive a small annual payment for at least three years for administering North, and the strategic benefit of gaining distribution access to NAB is portrayed as particularly valuable.
Why did so few buyers initially want to buy the North platform?
The article explains many potential buyers were reluctant because the underlying DST technology used by North is available off the shelf, making the platform easier to replicate. That reduced the appeal of buying North outright — IOOF’s management nonetheless saw strategic value in taking it on.
What are the main regulatory and shareholder risks that could still derail the NAB–AXA–IOOF arrangement?
Key risks noted in the article include the ACCC’s final decision (due September 9) and the requirement for NAB to address 13 concerns raised by regulators. There is also the potential for the treasurer to intervene. On the shareholder side, NAB shareholders have been publicly sceptical of the deal and NAB’s share price has suffered; Credit Suisse flagged the risk that NAB may have paid too much, which could prompt renegotiation if AXA’s share price falls further.
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