North platform a win-win for IOOF but prospects for competition head south

The competition watchdog decided yesterday to let the NAB-AXA political hot potato go through to the keeper until after the election. To this end it released NAB's proposed enforceable undertaking to the market for consultation, with a decision due on September 9.

The Australian Competition and Consumer Commission yesterday invited submissions from industry participants but the feeling is the ACCC has boxed itself in by narrowly focusing on the impact of the merger on retail investment platforms for investors with complex investment needs.

NAB now must satisfy 13 concerns and the deal will be done - assuming the treasurer, whoever that is in two weeks, does not intervene and reject the deal.

It explains why AXA's share price bolted to close 5.4 per cent higher, NAB's ended flat after being lower for most of the day and IOOF's jumped 4 per cent.

In April, the ACCC knocked back the original merger proposal on the basis it lessened competition in retail investment platforms. NAB had lobbed a bid on December 17 to acquire AXA APH for $13.3 billion and sell its Asian assets to French parent AXA SA.

NAB then set about finding a buyer for AXA's North platform to pacify the ACCC. Nobody wanted to buy it because anybody can buy the DST technology off the shelf. Then IOOF and its wheeler-dealer chief executive Chris Kelaher, who has more platforms than he can poke a stick at, decided the North platform was special.

And it is. The economics of the deal is shrouded in mystery. However, from the outset it will be earnings per share accretive for IOOF and "not material" from a financial aspect.

From IOOF's perspective, it is a master stroke. If the deal goes ahead, IOOF will effectively get paid a few million dollars a year for a minimum of three years for the privilege of getting the AXA-NAB deal across the line.

Second, and possibly even more importantly, it puts IOOF in NAB's world. If it ends up with the North platform, IOOF will rent distribution for a period of time, and the platform - which will include IOOF's own products - will be distributed via NAB's dealers.

The deal is structured so that IOOF acquires the North platform and provides platform administration services to AXA for the North products for three years. After that, the $1.4 billion funds under management will transfer to a merged NAB-AXA.

But from the perspective of increasing competition in financial services, this deal will not do it.

According to Rainmaker, IOOF would jump two ranking places to No. 6 with 4.5 per cent of the market while the NAB-MLC-Aviva-AXA group, without North, would still rank No. 2 with 20 per cent market share. Westpac-BT would be No. 1 with 29 per cent. In the platform market overall, Rainmaker estimates the combined NAB group would control almost 25 per cent of the market, which is one-third more than the next player.

The ACCC's focus should never have been on reduced competition among retail platforms for investors with complex needs. The real focus should have been on distribution, in particular aligned distribution. Less than 10 per cent of financial advisers use the North platform.

What made the deal unpalatable to so many was the domination of the banks and their control of most of the life insurance market and most other financial products.

AXA shareholders want the deal to happen. The takeover is at a hefty premium to the current share price and, if the deal doesn't go through, AXA investors will be left with a major shareholder, AXA SA, which holds 54 per cent of AXA Asia Pacific, which clearly wants out.

A note from Credit Suisse yesterday said AXA's stock price, which remains below NAB's all-cash offer price of $6.43, was sparking worries by NAB's major shareholders that it may be paying too much to acquire the target company. It said if the share prices fell further, NAB's board would have no choice but to renegotiate the price of the acquisition.

It is no doubt a question that will be raised at today's third-quarter results update for NAB.

NAB's shareholders have made it clear from day one, December 17, that they did not want the deal to proceed. The share price has tanked accordingly, leaving NAB the worst performer of the big four banks.

Despite this, its chief executive, Cameron Clyne, has persisted, and it looks as if his persistence might have paid off.