FNZ, the company which brought new-age investment options to Australia’s largest super funds, could be forced to sell down its acquired Australian software firm, GBST, by November 19, after the takeover was deemed anti-competitive by a UK regulator. In a decision handed down last week, the Competition and Markets Authority (CMA) ruled the $260 million-plus deal, in July 2019, would create “a substantial lessening of competition” in the UK retail platform market.
The competition regulator first put a hold on any potential FNZ/GBST merger in the UK last November ahead of a decision in March to further investigate market share issues. Both FNZ and GBST are significant players in the retail investment administration space, albeit that the former is a full custody ‘platform as a service’ provider while the latter supplies software only.
After completing its ‘phase two’ investigation, the CMA found the proposed merger “has resulted in the Parties’ enterprises ceasing to be distinct, and as a result, having a combined share of supply of at least 25 per cent in the supply of retail platform solutions in the UK”. The CMA has left open a short window of appeal to its “provisional findings” with objections due to be lodged by 5pm on August 25.
Failing any successful appeal, the regulator says its preferred option would see FNZ offloading GBST in full.
“A full divestiture would require the sale of the whole issued share capital of GBST, as acquired by FNZ on November 5,” the CMA says. But the regulator leaves open the option of a partial sale among its short list of possible ‘remedies’.
For example, FNZ could sell off the offending UK parts of GBST, the remedies paper says.
“At this stage, the CMA has not identified any partial divestiture option involving FNZ operations that would be likely to be an effective remedy,” the regulator says. “However, the CMA will consider any divestiture remedies put forward as part of this consultation.” Feedback on the remedy proposals is due by August 20. The CMA notes any forced sale would introduce risks if a “suitable purchaser is not available” or FNZ finds a “weak or otherwise inappropriate purchaser”. Furthermore, the regulator says GBST’s value could “deteriorate” during the sales process. Either way, costs will fall on both FNZ and GBST.
“In relation to completed mergers, the CMA will not normally take account of costs or losses that will be incurred by the merger parties as a result of a divestiture remedy,” the CMA says. The decision is major blow for FNZ, which fought aggressively to buy GBST as a launching pad for further global expansion, including in Australia.
In a response to the CMA investigation, the Edinburgh-headquartered platform business says: “The primary driver [of the GBST purchase] is the opportunity for FNZ to compete more effectively with larger global players in non-UK markets (in particular Australia). After adapting its system for AustralianSuper’s refurbished member investment options, FNZ set up a successful operation in Australia, eventually to be led by former Minister for Superannuation, Nick Sherry. Several other big Australian funds followed suit.
“In the UK, the Transaction will result in increased investment, enabling GBST customers to take advantage of enhanced functionality and lower operational costs, if they elect to do so.” The FNZ response also argues that the CMA focus on retail platforms was too narrow while also describing GBST as a “weak rival” in the UK. According to the FNZ document, the company lost a competitive bid to GBST only once in the last 10 years (excluding another recent FNZ purchase, the UK software firm JHC). “Much of the evidence in the Decision merely demonstrates that the Parties compete (which is not denied),” the FNZ response in May says. “The reality is that they are in no way close competitors.”
In a release, CMA inquiry group chair, Martin Coleman, rejected the FNZ defence. “The evidence we’ve seen so far consistently points in the same direction – that FNZ and GBST are two of the leading suppliers within this market and compete closely against each other,” Coleman said. “That’s why we’re concerned that their merger could lead to investment platforms, and therefore indirectly millions of UK consumers who hold pensions or other investments, facing higher fees and lower quality services.”
GBST said in a statement that the firm would continue to “operate as normal and the prospects for our business remain strong”. The statement said: “Our pre-acquisition management team, headed by Rob DeDominicis, and existing project teams remain in place to deliver business as usual for clients and we continue to progress our technology upgrade on schedule and develop our proposition to meet the needs of our clients and the market.”
FNZ told UK media it had “no comment at this stage” on the GBST decision. But, on the same day as the CMA announcement, the NZ-founded group, headed by Adrian Durham, confirmed it had closed a deal to buy the third-party investment administration firm, Irish Progressive Services International (IPSI).
“We are pleased to have completed the acquisition of IPSI,” Durham said in a release. “This marks the next step in FNZ’s European growth strategy and provides us with considerable oversight and operational [third-party administration] experience.”
– David Chaplin, Investment News NZ