Morningstar backs sense of L1/Platinum merger

Research and ratings house Morningstar has backed as sensible the merger of L1 Capital with Platinum Asset Management.

Just over a week out from Platinum holding an extraordinary general meeting for shareholders to vote on the merger, Morningstar analyst, Shaun Ler has backed the rationale behind the merger and why it should go ahead.

“We think the merger is sensible for a business facing organic decline like Platinum,” Ler’s analysis said.

“The merger with L1 Capital would arrest Platinum’s earnings decline by combining with another asset manager with better-performing products enjoying inflows, while allowing duplicate costs to be cut.”

His analysis then pointed out:

• The independent expert’s report notes that the merger would allow duplicate cost reduction, consolidation of functions, better cross-selling opportunities, positive influence on rating reviews and customer engagement, and faster introduction of new investment products.
• Another avenue for value accretion comes from L1 Capital taking control as investment adviser for Platinum’s underperforming products, most notably the flagship Platinum International Fund, which makes up 44% of Platinum’s funds under management. This could improve performance and reduce Platinum’s outflows.

The Morningstar analysis said the bottom line was that it was ascribing a 100% probability of the merger proceeding.

“Ultimately, the merger is a good deal for Platinum shareholders, in our view, with the combined entity having room to reduce costs through personnel reductions, consolidation of middle and back-office functions, and rationalizing overlapping infrastructure,” the analysis said.

“The group can also spread out rising compliance and technology costs across a larger FUM pool. The combined entity will have greater asset class and client diversity, facilitating cross-selling and customer retention. This should help stabilize FUM and improve earnings, mainly from cross-selling L1 Capital’s products to Platinum clients (vice versa being unlikely).

“Moreover, having a larger capital base, a broader investor network, and improved operating leverage could also enable faster rollouts of new products, which typically have to be seeded and run on a pilot for extended periods. This helps the group to maintain its relevance among investors who are today spoiled with extensive investment choices.”