Fitch Ratings views the announced merger between Janus Capital and Henderson as an understandable response to on-going asset flow and fee pressure on active investment managers, and if successfully executed, could potentially result in positive rating momentum, albeit over a longer-term horizon.
From a quantitative perspective, the increased scale, greater geographic, investor and product diversity, potential synergies and lower leverage of the combined entity are all viewed positively by Fitch.
Janus expects that pro forma for the merger, assets under management would increase to $322 billion from $195 billion, annual run rate cost synergies of $110 million would be achieved, and cash flow leverage would decrease to 0.6x from 1.2x.
The Dai-Ichi Life Insurance Company’s stated support of the merger and intention to remain a meaningful minority owner of the combined entity are also viewed positively in terms of strategic alignment and client access in the Japanese market.
Fitch says that despite these potential benefits, it remains to be seen whether the combined entity will be able to counter asset flow and fee pressure experienced by active investment managers as a result of increasing investor preference for passively managed funds. Janus faced net client outflows in recent years, averaging -6.2% per year over the last four years, although net outflows moderated to -1.4% in 2015 and -0.2% in 1H16.
Conversely, Henderson experienced average net inflows of 4.1% over the last four years, with a 10.5% increase in 2015 and a -2% decrease in 1H16.
Fitch also notes the general integration and execution risks associated with mergers, particularly ones which cross geographic regions, entail co-CEO roles and involve broader reorganisation of executive management.
Fitch has previously noted that upside ratings potential could arise if Janus demonstrated consistently positive net client inflows, which translated into strong profitability metrics, while maintaining a conservative leverage profile and risk appetite.
Fitch maintains this viewpoint post-merger announcement.
The fact that the transaction is not expected to close until the second quarter of 2017 further extends the time period over which the potential benefits of merger would need to be evaluated.
At 9:00am: (LON:HGG) Henderson Group PLC share price was -3.45p at 257.75p
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