Renato Mota’s challenge is to integrate MLC into IOOF successfully

IOOF CEO Renato Mota. Picture: Stuart McEvoy.

Back in 2000 Renato Mota was a new recruit in Simon Moore’s NAB mergers department and his first big job was to work on the $4.5bn MLC acquisition. His IOOF shareholders will be hoping his latest MLC deal works out ­better.

Twenty years later Mota is buying the business for $1.4bn, or a third of the price.

The odds are stacked against him given the litany of failed wealth management mergers and the execution risks in a business in which your star talent walks out the door each night, and regulation says you must act in a client’s best interests — which isn’t always achieved by the synergy benefits you want to impose.

His hope is scale delivers better technology to actually prove the naysayers wrong and deliver affordable financial advice to the masses.

The deal was backed by a highly dilutive equity raising, comprised of a $588m entitlement offer and a $452m placement which only passed ASX limits because of the COVID exemptions.

The placement at $3.50 is already a 22 per cent discount to market and a fraction of the $10 share price three years ago, so shareholders are taking a big bet on Mota’s ability to execute two company-transforming acquisitions in as many years.

That explains why the payback period starts in three years.

You may have thought COVID exemptions were to help people directly affected, like say Qantas or Fight Centre who lost the bulk of their business by ­government decree, but Mota is more an opportunistic empire-creator in the advice business.

To which the ASX says, in these difficult times: “Any listed entity that needs capital in the current market environment will face significant challenges in attracting that capital and the Class Waivers can appropriately extend to them”.

That is an extraordinary stretch, but COVID is being used to break all sorts of commitments, as shown by the glee with which the federal government is reversing plans to extend the superannuation guarantee from 9.5 to 12 per cent.

Jobs are the key issue, but any employee getting a legislated wage increase right now, whether by way of mandated savings or cash in the bank, would take it no questions asked.

Through this deal with $173bn under management Mota will come in second behind AustralianSuper at $182bn. He thinks the increase in superannuation guarantees should be deferred due to the recession.

The banks have now all given up on their wealth dream. Mota and IOOF have hoovered up the discards from ANZ, Bendigo and Adelaide Bank and now NAB, which tells you either he is the smartest owl in the tree and or the banks couldn’t manage the sector.

This is a massive deal for IOOF, given the company was valued by the market at $1.6bn on Monday and the purchase price is $1.4bn, especially when you consider that two years ago under former boss Chris Kelaher it faced a massive credibility hole in the wake of the royal commission.

When asked Mota said the resurrection was based on simply doing what they said they would.

The task has been to convince regulators it can be trusted with people’s money, and this task was made easier when APRA comprehensively lost its case against Kelaher and former chair George Vernados.

For its part, NAB has sold well. The purchase price at 17 times historical earnings of $83m is more than the 15.5 times paid by KKR for just 55 per cent of Colonial from CBA.

From NAB’s perspective, while the selling price is a third of what it paid 20 years ago, it is a clean sale of 100 per cent of the business which was only returning about 4.5 per cent.

NAB is retaining full remediation costs.

Mota says the difference between IOOF and the banks is focus — the banks were lenders who tried and failed in wealth management.

Like lemmings they followed each other into the industry, thinking their retail network was the ideal sales platform and not seeing the high reputational, conflict and conduct risks which meant the risk/reward balance was on the risk side.

IOOF says it is a focused wealth manager but its history is more of a classic roll-up — one of growth by acquisitions seemingly based on the fact if you keep moving no one can tell where you are up to.

IOOF has seven different investment platforms, including the three it is acquiring with MLC.

At some stage people catch up and Mota’s challenge is to ensure he has delivered on his promises.

The basic conflict remains in selling products through financial advice, when what is best for the customer is what counts.

For most people outside the top 10 per cent, advice is really only needed three times in their life: when they start earnings, inherit money or win the lotto, and when they retire.

He has the scale. Now it’s a question of executing and if he does it well he will go down as a hero because few before him have managed sustainable returns from wealth management acquisitions.

Clearance change

The ACCC has changed its takeover clearance regime, ending the practice of automatically notifying completed deals, which will instead be investigated behind closed doors.

In a letter to practitioners on Monday the ACCC said: “This should not be interpreted as suggesting that these specific investigations have concluded.”

Two high-profile completed deals on the books are the investigation the Qantas acquisition of 20 per cent of Alliance which began in February last year, and investigations this year into Facebook’s purchase of Giphy.

Risks and rewards

Judging by the federal government’s recent moves, Chinese investment in Australia is not welcome right now, but how about the reverse?

Many like ANZ and BlueScope have been in China for a couple of decades or more and are keeping their heads down for fear of getting a target on their back.

Seek is another to have done well from its investment in China through its stake in employment website Zhaopin, which last year reported earnings of $123.7m on revenues of $749.6m.

Seek chief Andrew Bassat declined to comment on the investment other than to note his earnings presentation comments saying the company was positive and committed to the investment.

A Bloomberg report last week said fellow shareholders in the company, Chinese private equity firms Fountain Vest and Hillhouse, were looking to sell down their positions in Zhaopin but retain majority control.

His approach suggests while the investment is performing well and the fundamentals stack up in terms of an emerging middle class, increasing urbanisation and massive population, he will not be deterred by short-term political noise. The same goes for other Australian companies invested in China contacted yesterday. It’s a matter of risk and reward.