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This year. We're going Beyond.

Tough FY20 result: IOOF (ASX:IFL) to acquire MLC

IOOF Holdings Limited (ASX: IFL) has announced its FY20 result, which was a tough one. It’s going to acquire MLC.

IOOF is one of the biggest wealth managers in the country. The proposed acquisition of MLC could make it the biggest.

IOOF’s big MLC acquisition

IOOF has announced that it’s going to acquire National Australia Bank Ltd’s (ASX: NAB) wealth management division called MLC, for $1.44 billion.

IOOF will be buying MLC’s financial advice (excluding the Meritum, Apogee and Garvan brands), MLC’s platforms and the asset management business.

This deal represents 7.4x ‘pro forma’ underlying net profit after tax (for the 12 months to September 2020) including the full year targeted synergies/cost reductions. Without the synergies, the valuation is 16.2x. The calculated synergies are predicted to be $150 million per annum by the third full year of ownership.

If the acquisition goes ahead, MLC will become the biggest retail wealth manager by funds under management, administration and advice (FUMA) with $510 billion, the biggest advice business by the number advisers with 1,884 advisers and the second biggest superannuation provider by funds under administration with $173 billion.

The company said the deal will help IOOF strive towards being the lowest cost operator and will help enhance outcomes for clients, members, advisers and shareholders.

The deal is expected to add 20% profit/earnings per share (EPS) on a FY21 pro forma basis, excluding transaction and integration costs (which amounts to around $360 million over four years).

It looks like a great deal if it’s integrated well. IOOF may need to do some work to get MLC to have the same ethos as IOOF.

Funding

IOOF is going to fund this in a number of different ways.

It’s going to do a capital raising. It will be for a total of $1.04 billion, consisting of a $452 million underwritten institutional capital raising as well as an accelerated non-renounceable entitlement offer for $588 million.

The raising will be done at a price of $3.50 per new share, being a 22.5% discount to the dividend adjusted last closing share price of $4.515.

It will also use $250 million of incremental senior debt, $200 million in a subordinated loan note issued to NAB and $40 million of existing IOOF cash.

IOOF FY20 result

Whilst the acquisition is exciting, the underlying FY20 result wasn’t great.

Underlying net profit was down 34.9% to $128.8 million. Statutory profit rose 414.6% to $124 million.

The result was tough despite total FUMA rising to $202.3 billion, up from $138.5 million last year.

During the year the company successfully completed the P&I business acquisition.

The IOOF board decided to declare a final dividend of 11.5 cents per share, down 28% from the prior half dividend of 16 cents. The business will reassess the dividend after completing the MLC acquisition.

Summary

The acquisition seems like a great move, if it can be integrated well. The capital raising is a very cheap price, so I’d take it up if I were a shareholder.

However, I’m not sure how much long term growth there is – perhaps it’s cheap enough to deliver market beating returns. It will help if IOOF continues to deliver a lot of the returns in the form of a dividend, so shareholders get clear returns without needing to rely on share price movements.

However, there are other ASX dividend shares I’d want to buy first like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

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Is BNPL the opportunity of a lifetime or is the sector a ticking time bomb?

Rask's analyst has just finished a 7,500-word report, The Ultimate BNPL Sector Report, taking a deep dive into this booming ASX sector. It shines a spotlight on each of the major players. You can get the full analyst report for FREE by CLICKING HERE NOW.

Note: the report is 100% free.

At the time of publishing, Jaz owns shares of WHSP.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

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