UK wealth buyout requires elbow grease and luck
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic.
By Aimee Donnellan
LONDON, Aug 9 (Reuters Breakingviews) -The $7 billion buyout of UK wealth manager Hargreaves Lansdown HRGV.L will require some heavy lifting to work. On Friday, a consortium including private equity group CVC Capital Partners and Abu Dhabi’s sovereign wealth fund clinched the deal having spruced up an earlier offer. But with a higher outlay and the risk from falling interest rates, making a decent return looks tricky.
Hargreaves Lansdown started out life in 1981, when it was founded by Peter Hargreaves and Stephen Lansdown. The investment duo initially sent out newsletters to clients advising them on what they should be investing in. It has since modernised and created a digital platform where clients can trade shares and monitor their pension wealth. Hargreaves has around 155 billion pounds of assets under management.
But in recent years its UK market dominance has been in jeopardy. New nimble entrants like AJ Bell have been growing rapidly and benefit from not having old IT systems that are costly to run. Hargreaves’ new owners need to transform the business to allow it to compete more aggressively with rivals. That will require a steep investment in the digital platform, cutting out the need to hire expensive staff to cater for new clients. In theory, that would help it grow its top line by more than the 3% analysts had pencilled in over the next three years, as per LSEG data.
Still, the math looks tricky. Assume Hargreaves can grow its current 765 million pounds of annual revenue by 5% over the next five years and increased its EBITDA margin from 52% to 57% thanks to a digital transformation. If so, the acquisition, worth 4.9 billion pounds once net cash is factored in, would yield a paltry 15% return. That’s well below the 20% buyout firms typically target.
To deliver a juicier return, Hargreaves will have to boost sales growth to the 10% per year AJ Bell is expected to deliver, as per LSEG forecasts. But that might be challenging. Hargreaves is already a dominant player and its smaller rival is charging lower fees, which explains why it operated with a 42% EBITDA margin last year. Falling interest rates may also reduce the amount of money these players make managing clients’ cash. That suggests Hargreaves will need a heavy dollop of luck to make a reasonable return.
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CONTEXT NEWS
British investment platform Hargreaves Lansdown on Aug. 9 agreed to a 5.44 billion pound ($6.9 billion) takeover by a consortium backed by private equity firm CVC Capital Partners and Abu Dhabi’s sovereign wealth fund.
The deal is the second largest by value struck this year by a London-listed company and is the latest in a string of takeovers of British companies.
It has the backing of co-founders and top shareholders Peter Hargreaves and Stephen Lansdown.
Hargreaves Lansdown shareholders will get 1,140 pence per share in cash.
The company in May rejected a 985 pence per share proposal from the bidding consortium and the two sides were locked in talks for several months following multiple deadline extensions for the suitors to make a formal offer.
The consortium said its latest offer was final and would not be increased unless a rival suitor emerges.
Hargreaves on Aug. 9 posted better than expected annual adjusted profit before tax of 456 million pounds, ahead of analysts’ average estimate of 428 million pounds, according to LSEG data based on 14 analysts.
Shares in Hargreaves were up 2.2% at 1,101 pence by 0739 GMT on Aug. 9.
Graphic: Hargreaves Lansdown has not been doing well on its own https://reut.rs/3SGeOoJ
Editing by Lisa Jucca and Oliver Taslic
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