UPDATE 4 — Shares of Edinburgh-based Standard Life Aberdeen fell about 5% after it was announced it will lose its biggest client.
Lloyds Banking Group (LBG) announced it will terminate a contract for Standard Life Aberdeen to manage £109 billion of assets for LBG’s Scottish Widows business.
The Scottish Widows contract represents almost 17% of Standard Life Aberdeen’s roughly £646 billion of total assets under management — but about only 5% of its 2017 revenues due to the relatively low profit margin on the Widows contract.
Analysts said there is a small chance Standard Life Aberdeen could still keep the Widows contract on a lower fee.
Termination of the arrangement is subject to a 12 month notice period.
There has been recent speculation that LBG had been considering a sale of Scottish Widows to Standard Life Aberdeen — and further speculation that the two firms had been considering a merger of their life insurance businesses.
Antonio Lorenzo, chief executive of Scottish Widows and LBG group director of insurance & wealth, said: “Given the merger of Standard Life and Aberdeen has resulted in our assets being managed by a material competitor, it is now appropriate to review our long-term asset management arrangements to ensure they remain up-to-date and that customers continue to receive good service and investment performance.
“Therefore, we will begin an in-depth assessment of the market to identify a long-term strategic partner, or partners, to manage the current £109 billion of assets.”
Keith Skeoch and Martin Gilbert, Standard Life Aberdeen’s joint chief executives said: “We are disappointed by this decision in the context of the strong performance and good service we have delivered for LBG, Scottish Widows and their customers.
“We will be discussing the implications of this with LBG and Scottish Widows.”
“It’s a blow for Standard Life Aberdeen, but it’s only to be expected,” Laith Khalaf, a senior analyst at Hargreaves Lansdown Plc, told Bloomberg.
“Standard Life and Scottish Widows are long-standing rivals, so one managing the assets of the other was never going to sit particularly comfortably.”
Speaking on Bloomberg Television, Gilbert described the Lloyds withdrawal as “one of those blips” and said the group’s global reach would limit its impact.
Gilbert told London’s The Daily Telegraph: “I suspect it’s disappointing to both sides – neither of us probably wanted this to happen.
“We both tried very hard to see if there was some sort of win-win situation for both of us.”
Gilbert said the company would repitch for some of the mandate if invited to do so, and denied it weakened the rationale for the merger.
“It doesn’t undermine it at all,” added Gilbert.
“The AUM headline is far worse than the revenue and profit aspect of it.
“The merger’s going really well. It was signalled in the prospectus that (this) would be a possibility.”
Standard Life Aberdeen said in a statement: “At the time of the announcement of the 2017 merger of Standard Life plc and Aberdeen Asset Management plc … Lloyds Banking Group and Scottish Widows committed to have discussions during the period of six months following the completion of the merger on 14 August 2017.
“Following the conclusion of the six month period, LBG and Scottish Widows have informed SLA that Scottish Widows and LBG’s Wealth business intend to review their long term asset management arrangements including those services that are currently undertaken by certain legacy Aberdeen entities under arrangements covering in aggregate c£109 billion of assets under management and agreed by Aberdeen with LBG at the time of Aberdeen’s acquisition of Scottish Widows Investment Partnership from LBG in 2014.
“The revenue associated with the AUM represents less than 5 per cent of SLA’s FY 2017 pro forma revenue.”
Standard Life Aberdeen will take an impairment charge of £40 million in its 2017 results.
Lloyds Banking Group said in a statement: “Scottish Widows and Lloyds Banking Group’s Wealth businesses have decided to review their asset management arrangements and have therefore given notice to Standard Life Aberdeen plc to terminate their partnership agreements with Aberdeen Asset Management plc.
“Scottish Widows and Wealth entered into the partnership with Aberdeen following the sale of Scottish Widows Investment Partnership in 2014.
“This included long-term contracts for the management by Aberdeen of over £100bn of assets on behalf of Scottish Widows and Wealth.
“These contracts enabled Scottish Widows and Wealth to terminate the contracts in the event that Aberdeen was subject to a change of control with a material competitor.
“Aberdeen recently completed a merger with Standard Life plc, which is a material competitor of Scottish Widows and also of Wealth.
“At the time, Scottish Widows and Wealth agreed to delay a decision regarding the exercise of their termination rights for a period of six months following completion of the merger, during which period the parties agreed to discuss in good faith ways to build a successful relationship and address the competition issue.
“As no agreement has been reached, Scottish Widows and Wealth have decided to terminate their partnership agreements with Standard Life Aberdeen and to review their long-term asset management arrangements.
“Aberdeen has delivered good service and performance and Scottish Widows and Wealth would welcome their participation in the review if Standard Life Aberdeen is able to resolve the competition issue.”