Magellan Financial Group Ltd (ASX: MFG) shares have gone into a trading halt after announcing a merger with Barrenjoey.
Magellan is a funds management business that gives exposure to Australian shares, international shares and infrastructure shares. Barrenjoey is an investment bank based in Australia, with growing exposure to some international markets as well. Some Barrenjoey services include corporate finance, fixed income and capital markets.
Merger with Barrenjoey
Magellan announced it has entered into an agreement to merge with Barrenjoey Capital Partners.
Magellan said that Barrenjoey has established market leadership across its businesses since its beginning, scaling to $522 million in revenue and $108 million adjusted NPATA (underlying net profit) over the last twelve months. The funds management business also noted Barrenjoey has “consistently exceeded expectations with strong organic growth, attractive returns on capital, and an entrepreneurial culture that positions the combined group for continued expansion.”
The transaction values Barrenjoey at A$1.6 billion and funded by Magellan shares. That’s a price/earnings ratio (P/E ratio) of 15 on a last 12-months basis.
Ahead of the merger, Magellan said it intends to buy 10% of Barrenjoey from Barclays for $148.9 million, which will be funded by a capital raising at $8.45 per Magellan share. The institutional placement will raise $130 million and a non-underwritten share purchase plan (SPP) aims to raise $20 million. This raising equates to 9.6% of Magellan shares.
Barclays is “highly supportive” of the merger, though its shareholding will be limited to 4.9% of Magellan’s shares to simplify the impact of US regulatory requirements of merged companies.
At completion, Magellan will issue 106.8 million new shares in total. 92.6 million Magellan shares will go to Barrenjoey shareholders, including employees and Barrenjoey directors, and Barclays will receive 14.2 million Magellan shares.
David Gonski will become independent Chair of the combined group, while Andrew Formica will be appointed as the Deputy Chair. A number of Barrenjoey directors, as well as Chair of Investment Banking at Barclays, Paul Compton, will join the Magellan board.
Brian Benari will be the CEO and Sophia Rahmani will be CEO of Magellan Investments Partners. Matthew Grounds and Guy Fowler will continue as co-executive Chairs of Barrenjoey.
What are the benefits?
Magellan’s board thinks there are a few benefits to the merger.
First, it’ll improve business diversification and resilience.
Second, Magellan believes it will enhance the client proposition across both businesses.
Thid, it will give the combined business the ability to retain and attract the best talent.
Finally, it’ll deliver a strong combined balance sheet to provide the opportunity for growth.
I’d also highlight cost and possibly revenue synergies between the two businesses as well.
Management comments
The Magellan Chair Andrew Formica said:
The merger with Barrenjoey marks a transformative step in MFG’s evolution, bringing together two highly complementary businesses to create an Australian financial services group with meaningful scale and breadth.
MFG and Barrenjoey share a deep commitment to clients and are built on innovation, entrepreneurialism and exceptional talent. We believe we are stronger together – with greater scale, broader expertise and enhanced capacity to create long-term value for clients and shareholders. We are excited to partner with Barrenjoey to pursue the significant opportunities ahead.
Final thoughts on the Magellan share price
This seems like a positive step by Magellan. Barrenjoey’s earnings seem to be going in the right direction compared to Magellan’s funds management earnings.
The price seems very reasonable, in my view. I think this deal is very compelling for Magellan shareholders. I’d be happy if I were a shareholder to take part in the capital raising. But, I’d want to see what value it’s trading at before committing to buying new shares on the market.
