LONDON (Reuters Breakingviews) - Société Générale boss Frederic Oudea has inadvertently put rivals on notice. A sale of the French bank’s passive investing unit Lyxor to Amundi is below a mooted 1 billion euro valuation, but at a racy enough multiple to estimated earnings. That should persuade rivals with smaller fund arms to consider selling up.
For Amundi, the 825 million euro purchase is a strategic no-brainer. Its share of rapidly growing exchange-traded funds in Europe should roughly double to 14% post-deal, still well behind market leader BlackRock but substantially ahead of current second-placed German rival DWS.
It makes financial sense too. Deducting 70 million euros in excess capital enabled by holding Lxyor in a bigger group implies Amundi will pay 755 million euros. Even if touted revenue synergies of 30 million euros never materialise, 60 million euros in cost savings should allow incoming boss Valérie Baudson to hit a 10% return target in three years’ time. Assume Lyxor’s projected 2021 earnings of 35 million euros remain stable and cost cuts could add another 44 million euros, once taxed at Amundi’s 27% rate. That implies a handsome 10.4% return on investment.
For Oudea – who flogged SocGen’s stake in Amundi back in 2015 only to watch the latter’s share price subsequently soar - the benefits are slightly less clear cut. Shareholders will be deprived of a steady, if modest, source of group earnings, meaning the bank becomes ever more reliant on volatile lending and investment bank income. Secondly, the price is substantially below the 1.3 billion euros Berenberg analysts reckoned the unit might fetch when sale talks were mooted last year.
Still, the unit remained subscale, and the sales price is 21.6 times Lyxor’s forward earnings. That multiple should be sufficient to persuade rival banks with comparable small-fry businesses to follow suit. UBS, with around 6% of the European ETF market, might expect a similarly rich valuation in a consolidating market. So to a lesser extent could BNP Paribas and HSBC, each of which has about a 1% market share, according to Morningstar data. A 2% rise in SocGen shares on Wednesday offers further encouragement.
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