BREAKINGVIEWS-Deutsche Börse finds tasty meal in Euronext scraps

By Neil Unmack

LONDON, Nov 28 (Reuters Breakingviews) - Deutsche Börse DB1Gn.DE may find a palatable meal in Euronext’s ENX.PA leftovers. The German exchange operator has launched a 5.3 billion euro bid for funds distribution business Allfunds ALLFG.AS, a similar price to the offer made by its rival two years ago. Stephan Leithner’s firm at least has a better shot at completing the deal and making a tasty return.

Despite listing just over four years ago, Allfunds has been a perennial takeover target. Its technology connects fund managers like BlackRock BLK.N with distribution agents like banks. It’s a fast-growing niche on the continent, as it allows retail investors to access a broader range of products than the in-house funds typically peddled by retail lenders. Still, its recent history has not been good: the shares have lost over half their value since it was listed by Hellman & Friedman and Singapore’s GIC. The business has been exposed to volatile asset prices, falling fees and more recently high interest rates, which pushed investors into cash.

Deutsche Börse’s offer is optically not that different from the tentative bid made by Euronext boss Stephane Boujnah in 2023, which was rejected. Leithner is now offering 8.80 euros in shares and cash, after factoring in an expected dividend, versus Boujnah’s 8.75 euros. Still, Allfunds’ undisturbed price is now some 10% lower - it was trading before the news broke on Thursday at a multiple of just 14 forward earnings, versus around 19 in February 2023, using LSEG data. That said Leithner’s timing isn’t perfect: in April this year Allfunds was valued at less than 11 times.

It's not yet a done deal, as counterbids could emerge from other exchanges - perhaps a fee-hungry bank, or even private equity. Deutsche Börse however has one big ace: it operates a similar distribution business, opening up the possibility of large savings from combining technology platforms. The flip side is that any deal will probably invite lengthy scrutiny from the European Commission, as it brings together the top two European players in this niche. Allfunds' role as a connector of cross-border investments may at least appeal to Brussels' desire to better mobilise the continent’s savings.

The current price could just work for Leithner. By 2027, Allfunds might throw off perhaps 500 million euros of operating profit, per analysts' forecasts polled by Visible Alpha. Assume Deutsche Börse can rip out savings equivalent to 35% of costs, as UBS analysts reckon. The post-tax operating profit could total 430 million euros, offering a roughly 8% return on the purchase price including debt.

That’s in the ball park of Allfunds' cost of capital, as per Morningstar. Given other potential bidders will struggle to find the same synergies, they may leave the hard work to Leithner.

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CONTEXT NEWS

Fund distribution business Allfunds said on November 27 it had entered into exclusive discussions with Deutsche Börse over a potential deal.

Deutsche Börse has offered to pay 8.80 euros per share, Allfunds said, comprising 4.30 euros in cash, 4.30 euros in shares and a 0.20 euro dividend. That values Allfunds at 5.3 billion euros in total.

Allfunds shares rose over 20% on November 27. On the morning of November 28 they were trading at 8.1 euros per share, up 0.3%.