By Gleb Kuznetsov, Carta Ryan, and Corey Sullivan (University of Queensland)
Summary
Despite the disruption caused by COVID-19, Iress, one of Australia’s largest Fintech players has preserved towards its acquisition of OneVue. This appears to be a strategic play to solidify its position as a leading player in providing platform services to Australia’s USD 1.8 trillion superannuation industry. Through adopting a capital raise to fund the purchase, and simultaneously shore up its balance sheet, Iress is counting on future synergies to justify its latest commitment to the increasingly dynamic and innovative industry.
Target Company Overview (OneVue)
OneVue provides wholesale wealth management services to a breadth of institutions, namely investment managers, custodians, and trustees throughout both Australia and New Zealand. The group primarily focuses on superannuation and investment management sectors through fund services and platform services.
Founded in 2004
CEO: Connie Mckeage
Number of Employees: 200
Market Cap: AUD 101m (USD 72.3m)
EV: AUD 98.5m (USD 70.5m)
LTM Revenue: AUD 48.7m (USD 34.9m)
LTM EBITDA: AUD - 0.34m (USD - 0.24m)
Acquirer Company Overview (Iress)
Iress provides market data, trading, compliance, order management, portfolio and wealth management, and other related tools across Europe, the Asia Pacific, and North America. It's software products include trading interfaces, order and execution management, order routing, and an entire breadth of analytical tools for investment managers and platforms, discretionary retail fund managers, private clients, as well as for institutional sell-side, retail, and online brokers. It also offers integrated financial advice software, and data-driven compliance and analytics for institutional and independent advisory clients.
Founded in 1993
CEO: Andrew Walsh
Number of Employees: 1,950
Market Cap: AUD 2.00 bn (USD 1.40 b)
EV: AUD 2.12 bn (USD 1.52 bn)
LTM Revenue: AUD 537.9m (USD 392.3m)
LTM EBITDA: AUD 109.6m (USD 78.5m)
Strategic Rationale
Iress Limited’s acquisition of OneVue Holdings is a strategic expansion that is set to be dilutive in the short term but provides the potential for revenue synergies in the future. OneVue is the largest single third-party fund registry in Australia, with a particularly large presence in superannuation, an industry with around AUD 2.7 trillion (USD 1.80 trillion) in assets. Iress CEO, Andrew Walsh, described the transaction as being driven by “structural shifts and changing market dynamics”. It is believed that better connecting advice recommendations and its implementation will lead to the provision of scale in funds administration and platform services. The deal also follows Iress’ expansion in superannuation; it won the AUD 30 billion (USD 20 billion) ESSS super fund in 2019 and the AUD 2 billion (USD 1.33 billion) Guild Super earlier in 2020.
Though it is believed that the potential for revenue synergies was the main attraction for Iress, Iress will be in control of a low-cost administration platform that will prove difficult for its competitors to match if all expected synergies can be implemented.
Further, the AUD 150 million (USD 105 million) capital raising undertaken to finance, in addition to the AUD 20 million (USD 13.4 million) share placement, the acquisition of OneVue will also be used to strengthen Iress’ balance sheet – the acquisition is set to cost Iress AUD 107 million (USD 77.8 million). The extra capital will also allow [Iress] to respond to opportunities in the prevailing environment’ according to Walsh.
For OneVue, this offer represents a very generous premium of 66.67% to its last traded price on 28th May 2020 and a 61% premium over the 6 month VWAP ending on the same day. The share price has recently been struggling in the market downturn, compounded by factors such as having to write down its receivables from the under-administration Sargon by AUD 26 million. This offer represents a "compelling certainty" to shareholders, in the words of OneVue Managing Director Connie Mckeage.
Background Information: Australian Superannuation
Superannuation in Australia consists of a government-mandated pension fund that every employed person in Australia has. It can only be accessed under extreme circumstances or upon reaching the preservation age (55 – 60 years depending on the year you were born). The Australian superannuation industry held approximately USD 1.81 trillion AUM at the close of the 2020 March quarter. The Australian Government mandates that all employers must contribute at least 9.5% of their employee's wages, in addition to the full salary, toward said employees' superannuation fund. This fund serves to provide Australians with enough funds for their retirement. There are a number of Superannuation funds in Australia, with many tailoring themselves to certain industries- such as the ‘Retail Employees Superannuation Trust’. The four largest superannuation funds account for under 20% of the market share. As a result of this system, Australia has the fourth-largest amount of pension funds globally.
Short-term Outlook
Operational Implications
Once Iress finalises its acquisition of OneVue, it is expected that OneVue’s position and strength in the administration of managed funds, investments, and superannuation, combined with Iress’ strength in data and software, will in collectively add to the pro-forma entity’s operations through technology. Although the transaction is expected to be dilutive 10% pre-synergies for the short term, highlighted by the raising of excess capital, the aforementioned technology innovation is expected to generate significant earnings upside potential for shareholders throughout 2021. As it stands, OneVue is loss-making under the Iress accounting approach, but analysts suspect that the extra capital raised provides additional room for more acquisitions, which is consistent with Iress’ history of acquiring small complementary businesses. With OneVue being the largest single third-party fund registry in Australia, the takeover will provide Iress with the scale to better connect advice recommendations with implementation and to leverage this strength in software and data, generating significant additional revenue through this capacity to leverage and expand its presence throughout Australia.
It is clear that the rationale behind the acquisition very much centres around the longer-term combination of scale in technology providing exposure to larger revenue streams, and Iress establishing a strong low-cost administration platform. Indeed, the main barriers in achieving these revenue synergies through combinations of platforms is increased competition in the space, centre mainly around the future policy surrounding superannuation withdrawal throughout Australia and how this varies with the macroeconomic environment throughout the region. In the midst of the Coronavirus-pandemic, the Australian government allowed tax residents to withdraw up to AUD 10,000 (USD 7,274) of their super for once for the 2019-20 financial year and again for the 2020-2021 financial year. This led to three million withdrawing AUD 28 billion (USD 20.4 billion), with AUD 42 billion (USD 30.6 billion) now forecast. Hence, how these policies change in the short-term could implicate the successfulness of OneVue’s administration of managed funds and its combination with Iress’ strength in data and software.
From a board perspective, OneVue’s managing director, Connie Mckeage, will continue to play a role during the transition period, and will consult the Iress on growth, strategy, and clients after completion. No other alterations are to be made to the board structure or internal management. From a shareholder perspective, the deal offers OneVue shareholders AUD 0.40 (USD 0.29) cash per share, whereby no majority shareholders of OneVue are to be carried forward to the pro-forma entity.
Financial Implications
With the deal being composed entirely of a cash consideration, the amount of AUD 107 million (USD 77.8 million) is partly being funded by a AUD 150 million (USD 105 million) institution placement, said to be followed by a AUD 20 million (USD 13.4 million) share purchase plan. Iress’ 31-Dec-19 annual report shows a cash and equivalents balance of AUD 33.3 million/USD 24.2 million (AUD 10 million/USD 7.3 million for OneVue as at 30-Jun-19), and issued-capital of AUD 383 million/USD 278.6 million (AUD 111 million/USD 80.7 million for OneVue). Depending on the accounting treatment of a number of balance sheet items, it is clear that the bulk of both OneVue and Iress’ capital structure composes issued capital; something of which is expected to remain clear in the pro-forma entity. Given the significant premium the offer represents for OneVue shareholders, the share price rose by ~81% from AUD 0.24 (USD 0.17) to AUD 0.38 (USD 0.28) upon announcement, with Iress’ share price being largely implicated by the capital raising conducted last month, offered at a 7% discount to the spot price at the time. Given the dilutive nature of the transaction, it is expected that a positive market reaction is unlikely until the realisation of long-term synergies discussed previously.
Long-Term Outlook
Historically, Iress has acquired small complementary businesses to create advantageous synergies and further enhance their business model - this deal is no exception. In order to keep up with the increased consolidation, digitally-enabled customization and an increasingly dynamic and innovative industry, wealth management firms are being encouraged to develop and adapt if they want to continue to be profitable. Iress plans to modernize its business operations by upgrading its technological infrastructure with the hope of enticing investors with new capabilities. This deal will bring together two firms who share a similar strategic purpose - to use the most innovative fintech to provide their customers with tailored wealth management advice. In 2020, the outlook remains that the global fintech market will see aggressive expansion, with firms looking to penetrate new market segments through technology and enhanced customer experiences. As areas of artificial intelligence and blockchain technology continue to develop, the fintech market is projected to face significant growth. This expansion will be driven by the development of accessible technology that simplifies the customer's experience through providing a streamlined platform for wealth management.
With structural shifts and volatile markets, this deal provides strategic leverage in combining a dominant funds firm with an innovative fintech company. The aim of the proposal is to fully integrate OneVue Investment Solutions with the Iress Acuity Superannuation business. The deal addresses both of the company's investment strategies by utilizing Iress’ advanced technology to provide innovative investment solutions. Given the AUD 115 million (USD 77.05 million) purchase price, the all-equity capital raise of AUD 170 million (USD 113.90 million) is expected to strengthen their balance sheet and provide Iress with the flexibility to pursue further investment opportunities. The company has opted against using debt to fund the acquisition and has taken a more conservative approach due to the uncertain economic environment. Iress is undertaking a fully underwritten placement of AUD 150 million (USD 105 million) to institutional investors and a non-underwritten Share Purchase Plan to eligible shareholders, which aims to raise AUD 20 million (USD 13.4 million). Iress believes that the long-term benefits of scale in technology and significant upside potential through continued innovation and automation outweigh the short-term concerns. Iress plans to use the additional capital raised in the deal to further integrate the two businesses to provide a low-cost administrative platform that competing firms will struggle to match. As there has been a vast amount of consolidation among the industry over the past five years, Iress acquisition stands out from its competitors as it seeks to “bring advice and investments closer together”.
Barriers to Deal Closure
Internally, it is clear that a major threat to the deal going forward is the attitude of billionaire investor Alex Waislitz, OneVue’s largest shareholder. Waislitz says that Iress’ offer of 40c drastically undervalues the business. Commensurate with the aforementioned AUD 170 million (USD 113.90 million) capital raise, entities associated with Alex Waislitsz, including Thorney Technologies Ltd, Thorney Opportunities Ltd, and Tiga Trading, have increased their stakes in OneVue to a total 16.04% of the company. With the full-scheme booklet set for distribution late-August 2020, it is clear that this poses a significant threat to the robustness of the deal and could test Iress’ offer price.
In terms of the aggregate industry, the future of policy surrounding super withdrawals poses a threat to the long-term stability of the deal, of which itself is reliant on the future of the Australian macroeconomy and aggregate household saving rates. If the future state of the Australian economy weakens, it may be a possibility that the federal government enacts yet another policy allowing early withdrawals of super amounts, posing a greater threat to OneVue’s capacity to drive returns through its administration of superannuation funds.
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