LONDON (Reuters) - Standard Life SL.L has reached agreement to buy Aberdeen Asset Management ADN.L in an 11 billion-pound merger that should save 200 million pounds a year in costs, pushing rivals to follow suit as fund managers' margins sag.
The all-share deal, creating Britain's biggest money manager and Europe's second biggest with 660 billion pounds in assets, values Aberdeen at 286.5 pence a share, or around 3.8 billion pounds, just above its closing share price on Friday of 286.4 pence. Standard Life's shares closed at 378.5 pence on Friday, valuing the company at 7.5 billion pounds.
The tie-up follows an industry shift towards rivals providing low-cost index-tracking products and away from so-called active investment management, which charges customers higher fees, and follows the $6 billion merger deal between Henderson Global Investors HGGH.L and Janus Capital JNS.N..
"We were both medium-sized asset managers ... we recognised mutual strengths, complementarity that will create an asset management powerhouse," Standard Life Chief Executive Keith Skeoch told reporters on a news conference call.
Standard Life made an operating profit of 723 million pounds in 2016, while Aberdeen made a pre-tax profit of 353 million pounds.
The deal is expected to lead to some job cuts and is likely to face tough questions from politicians in Scotland where there is increasing pressure for a second independence referendum after Britain's vote to leave the European Union.
Aberdeen's chief executive, Martin Gilbert, told BBC radio the deal would lead to job losses where the two companies had an overlap, but he said it was too early to say how many would go.
Ben Cohen, analyst at Canaccord Genuity, said there was a strong industrial logic for the merger in terms of scale, capabilities and cost savings.
"There will be a political dimension to the creation of a Scottish national champion, not least because the bulk of any cost savings will come north of the border," he said, reiterating a 'buy' recommendation on the stock.
By 1207 GMT shares in Standard were up 5.6 percent at 400 pence, while Aberdeen was up nearly 5 percent at 300 pence. Shares in rivals Jupiter Fund Management (JUP.L) and Ashmore (ASHM.L) were also higher as the market anticipated further consolidation among small and mid-sized firms.
Standard Life, roughly twice the size of Aberdeen, made its name selling insurance and traces its roots back to the 19th century. Aberdeen is one of Europe's largest listed fund groups.
The deal also follows increased pressure on fund management companies from Britain's Financial Conduct Authority to provide better value for money for investors.
Analysts at RBC Europe said the deal was defensive and did not come without negatives for Standard Life shareholders, who were "overpaying" for Aberdeen, an emerging market specialist which has suffered hefty outflows as investor sentiment towards these regions has soured.
"Aberdeen shares have performed strongly in recent weeks – as investors expect a takeover premium to be paid for the shares," RBC analyst Gordon Aitken wrote in note to clients, flagging an 'underperform' rating on Standard Life.
"As there is no bid premium Standard Life shareholders are effectively paying for this takeover premium over and above the fundamental value of Aberdeen."
The groups said the new company, to be headquartered in Scotland, would take a one-off 320 million pound charge to cover integration costs.
The companies said 31 percent of the merger benefits would come from simplifying and harmonising their operational platforms, 16 percent from eliminating overlaps in distribution and 12 percent from "a rationalisation of central functions."
The rest would come from property, legal, consultancy and also investment management.
Hargreaves Lansdown analyst Laith Khalaf flagged "considerable" overlap in their multi-asset, fixed income and property strategies.
Aberdeen's two-biggest investors, Mitsubishi UFJ Trust and Banking (8306.T) and Lloyds Banking Group (LLOY.L), have both given non-binding statements of support for the deal, which the companies expect to complete in the third quarter of 2017.
They had confirmed on Saturday that they were in talks over a deal in which Standard Life shareholders would own two-thirds of the combined group and where both sets of company directors would split power on the board.
"It reflects the direction of travel for Standard Life," given the company's move in recent years to build up its asset management arm and move away from insurance, said Liontrust fund manager Jamie Clark, which holds shares in the firm.
Skeoch, a fishing buddy of Gilbert's, who he has known for 30 years, said they first started having serious discussions about the deal in early January and had agreed to share the top job, a prospect that has worried some analysts.
"We have grave concerns over the structure of the board," Shore Capital analyst Eamonn Flanagan said in a note to clients, in which he gave a 'hold' recommendation on Standard Life.
"To us, a single CEO calling the shots and retaining overall responsibility is critical in all such transactions ... we wait to see how the chemistry between Skeoch and Gilbert develops."
($1 = 0.8141 pounds)
Editing by Jane Merriman, Greg Mahlich