FNZ and Australian-based financial software firm GBST are at odds on how to resolve a looming UK regulatory ruling that could scupper their planned merger.
Last month the UK Competition and Markets Authority (CMA) handed down a provisional recommendation that would compel FNZ to offload the former ASX-listed business it bought for more than $260 million in July 2019.
The CMA found a formal FNZ/GBST merger would create a “substantial lessening of competition” (SLC) in the UK retail investment platform market. In the August ruling the CMA says its preferred option would see FNZ sell-down GBST in full before mid November this year.
But in a last-ditch attempt to save the deal, FNZ via legal advisers Slaughter and May, propose a five-year free licensing of GBST ‘source code’ in the UK would counter any SLC concerns without the substantial costs and business disruption of a forced sale.
“Under this remedy, FNZ would make legally binding commitments for a five-year period to offer a non-exclusive, royalty-free, irrevocable and perpetual licence to GBST UK Source Code in an agreed form to any Supplier of UK wealth management platform solutions requesting a licence,” the FNZ appeal says. “The GBST UK Source Code base could easily be copied and isolated from the remaining GBST business to be provided to licensees.”
If the free source code solution was unpalatable to regulators, FNZ says a carve-off of the GBST wealth management arm could also end the regulatory impasse.
The appeal says selling the GBST UK management unit would allow FNZ to “deliver the expected benefits from the merger to Australian customers and to achieve the synergies expected from [it]… and from scaling up FNZ’s Australian business quickly”.
However, in its response to the CMA provisional ruling, GBST sides with the regulator against its current owner, arguing a full sale was “the only comprehensive and effective remedy”.
“GBST agrees that a structural remedy is necessary in order to restore the loss of competition between the parties at source and ensure the structure of the market itself continues to drive rivalry between the parties in the medium / long term,” the GBST reply says. “The only structural remedy that GBST considers would be effective to remedy the CMA’s competition concerns, restore the competitive structure of the market, be attractive to purchasers and enable GBST to operate as a viable business is a full divestiture of GBST.
“…. As GBST has explained in previous submissions, and as identified in the Provisional Findings, FNZ and Bravura are the only significant competitors to GBST in the UK.”
GBST also says the CMA should take the “unusual step” of appointing a ‘divesture trustee’ at the start of any sale “to ensure the divestiture process is completed as soon as possible without further degradation of the GBST business”.
The FNZ appeal says a forced sale of the entire GBST business would incur costs that were “significantly higher than GBST’s [wealth management] UK revenue of approximately £23 million”.
FNZ bought the-then ASX-listed software business through an audacious ‘Dutch auction’ process in 2019 with a bid starting at A$4 per share but sinking ultimately to A$3.85 as the GBST relented.
The CMA has extended the end date for ‘reference period’ for its final ruling on the FNZ/GBST tie-up from September 22 to November 17.
“However, the [CMA] Inquiry Group aims to complete the inquiry as soon as possible and in advance of this date,” the regulator says.
Founded in Wellington in 2004 by Adrian Durham under the original ownership of First NZ Capital (now Jarden), FNZ has grown into a global enterprise valued at about $3.5 billion based on a part-sale to new private equity shareholders in 2018.
After expanding into the UK, Europe and Asia, FNZ ventured into the US platform market this July in a deal with State Street. Under the arrangement, FNZ bought most of the State Street US wealth management services business for an undisclosed sum. However, State Street retains a minority interest in the wealth management business as well as serving as sub-custodian.
In a release, Durham said: “This is the first step in a long-term strategy to expand our platform into the North American market. In the US, we see similar long-term drivers in relation to cost, transparency, digitization and personalization in asset and wealth management as other markets in which we operate.”