IOOF to acquire National Australia Bank’s MLC in $1.5bn deal

IOOF will snap up NAB’s MLC division, effectively ending the lender’s 20-year push into wealth management.

IOOF chief executive Renato Mota spearheaded a deal to buy MLC. Picture: Stuart McEvoy

The major banks’ retreat from the wealth management sector is edging closer to completion after wealth group IOOF agreed to snap up National Australia Bank’s MLC division in a deal pegged at up to $1.5bn.

The Australian understands the parties agreed to terms on Sunday and were putting the finishing touches on a transaction announcement planned for Monday.

IOOF — which has a market capitalisation of $1.63bn — is expected to kick off a capital raising of about $1bn to help fund the transformational deal, which will include a distribution agreement with NAB.

Sources said the deal took into account separation costs and that any additional customer compensation charges, regulatory issues or litigation historically linked to MLC will reside with NAB.

MLC is the bank’s financial advice, superannuation and investment platform business, and the agreed sale will effectively end the lender’s 20-year push into wealth management.

The transaction’s announcement will coincide with IOOF’s profit results, which will be presented by chief executive Renato Mota on Monday.

A NAB spokesman declined to comment on the mooted MLC deal, as did an IOOF spokeswoman.

The latest transaction comes about three months after Commonwealth Bank agreed to sell 55 per cent of Colonial First State to KKR & Co for $1.7bn. Westpac last year sold part of its financial planning unit, while ANZ has completed divestments of its adviser dealer group and pensions and investments business to IOOF.

IOOF’s adviser Citigroup was speaking with the company’s shareholders on Sunday on details for the capital raising, including the price, which was set to print at $3.50 per share.

That reflects a 24.4 per cent discount to where IOOF’s stock last traded, before it was placed in a trading halt on Thursday pending an update on a “potential significant transaction”.

IOOF won the MLC auction which had also included private equity players KKR, Platinum Equity and JC Flowers, which counts former Westpac CEO David Morgan as its Asia-Pacific chairman. Dataroom flagged IOOF’s interest in MLC on August 3.

The purchase price is lower than some in the market expected, given MLC’s earnings have been declining.

When NAB CEO Ross Mc­Ewan handed down half-year profits in April, MLC posted cash earnings of $42m for the six months ended March 31, down from $78m in the same period a year earlier.

The non-cash earnings items in the interim accounts included $37m in MLC divestment and separation costs, in addition to the $33m booked in the previous six months.

NAB’s latest results showed MLC — led by Geoff Lloyd — had assets under management of $153.7bn and funds under administration of $105.2bn.

The MLC purchase will require approval by the Australian Prudential Regulation Authority and probably the competition regulator.

“It’s a hell of a bold move,” one IOOF investor said of the MLC purchase, on condition of anonymity.

“It’s (the acquisition) got some merits, but I will hold judgment.”

Bell Potter analyst TS Lim ­labelled the MLC sale a “good move” for NAB, with the price likely to reflect indemnities and warranties in place to cover future customer compensation or regulatory costs not already provisioned for.

It’s “in line with Ross’s simplification to just focus on core banking”, he said. “This will also shore up capital.”

Bankers and lawyers canvassed by The Australian said the biggest challenges for IOOF in undertaking such a large purchase would be integrating the MLC business, ensuring synergies with its existing operations and managing any complex changes in systems and technology.

In a quarterly trading update earlier this month, NAB said it had “substantially achieved” the operational separation of MLC as it continued to press ahead with exiting the business.

The bank’s common equity tier one capital ratio printed at 11.6 per cent at June 30, after it raised $4.25bn from investors earlier this year to bolster its balance sheet in light of higher loan losses stemming from COVID-19 and a recession.

NAB has been exploring strategic options for MLC for several years, including a potential spin-off of the division. Morgan ­Stanley and Macquarie Capital are advising NAB on the divestment.

The bank purchased MLC from property group Lendlease in 2000, as the major lenders piled into the wealth and life insurance sector following CBA’s acquisition of Colonial.

The MLC transaction follows IOOF’s agreed deal in 2017 to buy ANZ’s pensions and investments business, along with financial planning dealer groups.

Completion of the pensions and investments business purchase was delayed, though, by the banking regulator’s action and licence conditions imposed on IOOF. That part of the broader deal completed in February this year.

A spate of scandals in the financial advice and wealth sectors have spurred the big banks to exit the industry and pay out billions of dollars in compensation to aggrieved customers. The Hayne royal commission in 2018 fleshed out structural issues in the banks’ models, including conflicts of interest.

Westpac last year sold part of its financial advice business to boutique firm Viridian, shutting down the remainder. The bank is also considering strategic options — including a sale — for other parts of its wealth business including its investment platforms and life insurance unit.

NAB offloaded an 80 per cent stake in its life insurance division to Nippon Life five years ago, and has retained the residual holding. The bank has, however, committed to retaining private wealth and stockbroking arm JBWere.