Banco Santander will combine its asset management arm with Pioneer Investments, a unit of Unicredit. The combined company will manage $429 bn in assets. This deal follows the recent trend in the M&A activity of Asset and Wealth Management firms. Enhancements to profitability, economies of scope and scale, and regulatory compliance are amongst the main drivers of the transaction. In order to increase the likelihood of acceptance by U.S. regulators, the new company will allocate ownership of the US business to Unicredit and two private equity firms, leaving Santander out of the equation.

Industry overview

Asset and wealth management M&A activity has made 2014 an exciting year, with 86 announced deals totaling over $20 bn in volume. One major reason for the increased activity was the strong performance of financial markets and the consequent significant increase in revenues. Another important reason is that many bulge bracket banks have been trying to divest their balance sheets and sell their asset management divisions to comply with stricter regulatory requirements. The trending increase in regulations is playing a crucial role throughout the financial sector, as we could also observe in the recent deal between TSB and Sabadell.

Additionally, there has been a strong interest in investment management in Asia, due to the ageing population and increase in incomes. Finally, cost optimization has been also a key driver, as many institutional investors have been seeking for diversification of investments and more complicated products that are characterized by higher costs (due to the smaller volumes).

Pioneer Investments is the asset management arm of Unicredit Group and it is one of the largest asset managers worldwide, with over €200 bn of assets under management. In 2014, the company was ranked among the top five highest selling asset managers in the EU.

Although present in 28 countries, Western Europe and Latin America serve as the core markets of the company, which account for over 70% of its business. The Italian market counts for around 50% of the total assets due to the high profit margins.

Philip L. Carret, one of the most famous investors in modern history, established the company in 1928. In fact, Pioneer is the third oldest mutual fund in the U.S. and the first foreign fund manager in Germany. Unicredit Group acquired it in 2000 and 6 years later merged it with HypoVereinsbank asset management division. In 2010, Unicredit tried to sell Pioneer and received bids from Amundi, Natixis, and British insurer Resolution. However, a new CEO was appointed and Pioneer remained part of the group.

Santander Asset Management, present in 13 countries, is the largest asset manager in Spain and Latin America, with €164 bn of assets under management. Most of the AUM are generated by private investors in emerging markets and institutional clients. The company is owned in equal parts by Banco Santander and the private equity firm Warburg Pincus.

In 2004, following the acquisition of Abbey National by Banco Santander, the Asset Management arm of Abbey was integrated in SAM UK. Later, SAM expanded further through other integrations: in 2008 of some asset management arms previously controlled by ABN Amro, and in 2011 of Polish asset manager BZ WBK TFI. Recently, the company has also launched cooperations with two venture capital firms to strengthen its position.

Transaction drivers

The creation of an efficient global player is the first and main driver behind this transaction. The deal is regarded as extremely positive for both banks due to the geographic and business fit between the two partners. The combined entity will enter in the top 10 European asset managers by size and in the top 30 worldwide.

The new company will enjoy greater geographic diversification, with activities in over 40 countries, specifically with a strong presence in Latin America and U.S. This powerhouse will manage over €400 bn in both mature and high growth markets. Diversification benefits in terms of products and client base will further create unparalleled distributional capacities in Europe and Latin America.

The substantial scale enhancement produced is fundamental in this industry, historically speaking, which gives Pioneer a competitive advantage. The merger is expected to deliver enhanced growth and profitability, while allowing both banks to generate significant synergies through cross selling of complementary products, cost-cuttings and capital improvements. Clients will also benefit from the deal, as it will improve the product and service offerings.

Regulation is another fundamental driver in this transaction. Both Santander and UniCredit are currently focusing on key lending activities in order to meet more stringent regulations, which require larger capital cushions. Like other big European banks that have already sold their asset management businesses, such as Lloyds Banking Group and Société Générale, they are seeking to bolster their core capital base and repair their balance sheet, ahead of “health checks” of Eurozone banking systems.

In particular, Santander is seeking to boost profitability by focusing on the commercial banking business in its 10 main markets, and by becoming stricter in allocating capital to its activities. To comply with US regulations, the Spanish bank will not be a shareholder of the main holding company in the US: last year the Spanish Bank failed the Fed’s stress tests, and this strategic separation will avoid a rejection of the deal by US regulators.

UniCredit, instead, is curbing risk, cutting expenses and shedding assets as part of a five-year plan focusing on higher income and capital for the bank. In line with these goals, the deal will add around 25 basis points to Unicredit’s Common Equity Tier 1 ratio, one of the main regulatory measures of capital strength, shortly before the results of ECB stress tests. By selling the control of Pioneer, UniCredit will no longer include its assets in its accounts. It should be noted that at the end of June 2014, UniCredit’s CET 1 ratio was 10.6%, slightly above the 10% level that most analysts believe is the minimum required for the systemically important banks. This deal would provide a major improvement in meeting this threshold. Finally, movements toward a stronger capital base and enhanced profitability will help offset its’ diminished profits in Italy (due to recession), and in Russia (due to sanctions).

Terms and structure

At the end of July 2015, Unicredit had received four bids for Pioneer Investments. The highest (which valued Pioneer around €2.75 bn) came from Santander, Warburg Pincus and General Atlantic (advised by UBS); the other bids came from Advent International (advised by Goldman Sachs and Mediobanca), CVC Capital Partners (advised by Deutsche Bank), and GIC Private Limited (the sovereign fund owned by the Government of Singapore).

Due to the complex structure of the deal, the signing of the agreement has been held back since autumn 2014. The transaction took a new turn after Ana Patricia Botin took over as Santander Chief Executive Officer. The second failure of the U.S. stress test, as well as the Federal Reserve criticisms towards Banco Santander for paying an unauthorized U.S. dividend last year, are elements that explain the strained relations between the bank and U.S. authorities. Under these circumstances, an expansion of U.S. operations through a merger with Pioneer could have worsened the position of the bank. Excluding Santander from Pioneer’s ownership in the US overcame these issues. Unicredit will have 50% of the shares of the combined entity US operations, while the other 50% will be owned by Warburg Pincus and General Atlantic; the operations outside of the US will be split amongst all the players: 33.33% of the shares to Unicredit, 33.33% to Santander, and the remaining 33.33% split between the two private equity firms.

pioneer santanderJuan Alcaraz, current CEO of Santander Asset Management, will be the Chief Executive Officer of the new company, while Giordano Lombardo, current CEO and CIO of Pioneer Investment, will be the Chief Investment Officer of the new company.

Unicredit was advised by Morgan Stanley and Bank of America Merrill Lynch, while Santander, Warburg Pincus and General Atlantic were advised by UBS.

Sources: Bloomberg, Financial Times, Il Sole 24 Ore, Reuters.

To contact the autors:

Adele Bertolino                    adele.bertolino@studbocconi.it

Alessandro Caiumi             alessandro.caiumi@studbocconi.it

Giulio Giacomo Coperti     giulio.coperti@studbocconi.it

Giulio Tanzi                          giulio.tanzi@studbocconi.it

Dimitar Stoyanov               dimitar.stoyanov@studbocconi.it

Steven Suskauer                  steven.suskauer@studbocconi.it

To contact the editor responsible for this article:

Steven Suskauer                  steven.suskauer@studbocconi.it