Synergies Support Platinum-L1 Capital Merger

This story features PLATINUM ASSET MANAGEMENT LIMITED. For more info SHARE ANALYSIS: PTM

The company is included in ASX300 and ALL-ORDS

Analysts review cost synergies and growth prospects resulting from the merger between Platinum Asset Management and L1 Capital.

-Proposed merger between Platinum Asset Management and L1 Capital has board approvals
-Both asset managers seen as complementary by fund strategy and client base
-Deal offers benefits through cost synergies and fresh growth prospects
-Performance fee protection for Platinum shareholders

By Mark Woodruff 

On assessment of what effectively constitutes a financial takeover of Platinum Asset Management ((PTM)) by Melbourne-based fund manager L1 Capital, the general conclusion drawn by analysts is the deal is highly favourable for Platinum shareholders, long-suffering or otherwise.

Given the share price has declined to around 56.5c today from above $9.00 a decade ago, the bar for appealing to long-term investors in Platinum is arguably low.

Aligning with prior ASX updates since May, the latest merger announcement provides further details on L1 Capital’s key funds, strategy, financial metrics, as well as anticipated cost synergies and earnings per share uplift.

Post the “merger” (that’s how it officially is being presented), the asset manager will rebrand with a new name and ASX ticker (yet to be announced), although underlying funds will retain their original names and company brands.

Jarden sees the respective funds under management (FUM) bases of Platinum and L1 Capital of $8.1bn and $8.4bn as highly complementary by both fund strategy and client bases. Platinum has a higher weighting in international equities while L1 has a greater domestic focus.

Management’s target for around $20m in cost-synergies is over and above Platinum’s planned $10-15m cost-out strategy for FY26. The combined $30-35m represents around 25-30% of the combined cost base of $134m, explains Bell Potter.

This broker suggests the deal represents a very good outcome for Platinum as momentum in the L1 business means the combined business should be growing, particularly as the analysts had assumed the Platinum business would continue to wither.

Jarden also believes the proposed merger is strategically sound, with L1 potentially helping to stem Platinum’s outflows, while Platinum’s strong balance sheet could provide L1 with capital to support new strategy launches.

Jarden analysts estimate the proposed merger would be around 11% EPS accretive 12 months after completion and circa 38% accretive in FY27.

Assuming the deal goes ahead and two businesses become one, Platinum shareholders will own 26%, with 74% for L1.

Platinum’s Board unanimously recommends Platinum shareholders vote in favour of the proposed merger in the absence of a superior proposal and subject to an independent expert’s assessment.

Advantages and Disadvantages

UBS believes existing Platinum shareholders benefit from reinstatement of terminal value and longer-term optionality. On the other hand, the arrangement between Platinum and L1 on performance fees is seen favouring existing L1 shareholders.

Longer-term optionality is dependent on whether the merged company can be successful at launching new products, alternative assets, and be proficient at distribution, partly funded by $191m of cash on Platinum’s balance sheet.

In recent years, Platinum’s terminal value had effectively been discounted or even written off by the market due to declining funds under management (FUM), net outflows, and lack of growth.

The main Platinum funds are: the International Fund, the Asia Fund, the Global Fund, the European Fund, and the Japan Fund.

By contrast, L1 brings a strong performing stable of five growing funds, represented by the Long Short Fund, the Catalyst Fund, the International Fund, the Global Opportunities Fund, and the UK Residential Property Fund.

Platinum’s Chief Executive Officer Jeff Peters suggested the “combination will enable us to deliver on our strategic goals sooner, while providing a pathway to significantly increase and diversify assets under management”.

Bell Potter agrees, highlighting the combined entity will have greater scale, stronger investment performance, better distribution, a wider range of strategies and clients, and a stronger balance sheet.

A combination between the two will be a broader diversified global asset manager, points out the broker, with $16.5bn of FUM and combined proforma revenue of $231m, including $44m of performance fees from L1.

Regarding performance fees, here Platinum shareholders will only receive the first 3.5% of absolute returns (‘in-perimeter’) generated by L1’s flagship Long/Short Fund. Existing L1 shareholders will receive anything in excess, or the ‘out-of-perimeter’ portion.

Providing downside protection for Platinum shareholders, if returns are poor or negative, their ‘in-perimeter’ entitlement is preserved and will be paid from future outperformance before L1 shareholders receive excess performance fees.

Growth and Savings 

Strong momentum at L1 suggests the combined business should return to growth, prompting a lift in Bell Potter’s long-term growth assumption from a negative -9% to a positive 2.5%, with further upside potential.

After incorporating L1 into its financial modeling, the analysts expect the merger to be earnings accretive, with adjusted EPS forecasts rising across FY25-27 by 1.2%, 16.2%, and 66.8%, respectively.

The merger is forecast to triple revenue and increase costs by around 50%, though the share count rises nearly fourfold, notes Bell Potter. The number of new Platinum shares to be issued will be such that L1 Capital shareholders end up with 74% of the merged entity, with Platinum shareholders holding the balance.

This means the total number of shares on issue post-merger will be approximately 3.846 times the current number of Platinum shares, since 26% is the portion that current Platinum shareholders will retain.

According to the official release by management, the merger is EPS accretive ‘double-digit to 30%’ (FY26/27) on current consensus forecasts allowing for a FY26 total cost reduction of -$25m and a further -$20m of run-rate synergies in FY27.

These numbers allow for: Platinum to cost-out at the top end of its $10-15m target range in FY26; achieve 50% of the $20m run-rate synergies in FY26 and 100% in FY27; and includes around $36m of ‘in-perimeter’ performance fee contribution from L1.

Recent reporting by Platinum and the outlook

UBS notes Platinum’s FUM fell by -3.4% month-on-month in June to $8.1bn, driven by -$428m in retail net outflows, partially offset by a positive 1.7% market performance.

The broker highlights ongoing outflow risks, especially with plans to merge the listed investment trust (LIC) Platinum Asia Investments Limited into active exchange traded fund (ETF) Platinum Asia Fund.

Looking ahead to the FY25 result, the analysts expect operating expenses will rise materially due to -$40m in one-off turnaround costs, lifting total opex to approximately -$115m, -22% worse than the consensus expectation.

In response to ongoing revenue leakage from elevated fund outflows, the FY26 cost-out program has been expanded to -$10-15m, up from the previously targeted -$5m, notes UBS.

Jarden now expects platinum’s share price to be driven more by news flow around the proposed merger than by fundamental valuation.

In the FNArena database there are two daily covered brokers, namely UBS and Bell Potter, who research Platinum Asset Management.

Following the merger implementation deed, last week Bell Potter raised its target to 60c from 49c and upgraded to Buy from Hold, while UBS also raised its target to 53c from 47c but remained at Hold (equivalent).

Outside of daily coverage, Jarden retained its Hold rating after raising its target to 53c from 37c.

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