IOOF reveals HUB24 talks

IOOF Holdings has revealed that it is the mystery bidder for wealth management platform provider HUB24. Negotiations are at an early stage and may not lead to a transaction, but according to HUB24's announcement, a price of $2.75 has been offered. This equates to a market capitalisation of $144m and an enterprise value of $130m (after deducting net cash of $14m). We expect that IOOF will ultimately need to pay a higher price.

HUB24 runs a platform for wraps and separately managed accounts. The platform is highly regarded, being ranked third overall out of 22 platforms by Investment Trends in 2014, and being named as best for Tablet/Smartphone Access.

The technology has helped HUB24 grow quickly, with funds under administration (FUA) rising from $334m at June 2013 to $1.7bn at June 2015. At the end of August FUA was at $1.9bn, so it would add a fast-growing 6% slice to IOOF's Platform FUA of $34bn. Most likely, though, IOOF also has its eye on HUB24's technology, and how it might boost growth in its existing platforms.

HUB24 also owns a financial advisory business, Paragem, with 56 advisers across 22 practices nationally, with funds under advice of $2.7bn to add to IOOF's $34bn.

As befits a fast-growing 'fintech' business, HUB24 has never made a profit – at least not since its 2010 merger with Investorfirst, with annual operating losses bouncing around between about $5m and $8m since then. We'd expect, though, that IOOF would hope for synergies to reduce or eliminate these within a year or two. Of course, we'll have to wait and see whether a proposal eventuates, but it's certainly an interesting development.

In other news, we note that Maurice Blackburn has announced a potential class action for investors who bought shares in IOOF between 1 December 2013 and 19 June 2015. IOOF has rejected the claim, saying it is 'confident that the proposed action ... is misconceived both factually and at law. It would be purely speculative and is not in IOOF shareholders' interests'. We also don't think there's much in it, but Maurice Blackburn clearly think there's enough there to be worth their time.

At this stage we don't see much risk from the action (the greater risks from the recent media furore are those to IOOF's brand – see for example Media storm hits IOOF on 22 Jun 15 (Buy – $9.17)), but it's hard to know how these things might turn out. But ultimately the vast majority of IOOF's value wiill derive from the growth of its business and its underlying exposure to financial markets rather than any payout required under a successful class action.

We don't officially cover HUB24, but IOOF is down slightly since IOOF: Final result 2015 on 31 Aug 15 (Buy – $8.85) and remains a BUY.

Note: Our Growth and Equity Income portfolios own shares in IOOF Holdings.