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Morningstar | MUFG' Price for First State Seems Reasonable Given Exposure to Growing Asian Asset-Management Market

Mitsubishi UFJ Financial Group, or MUFG, reached a deal to buy Commonwealth Bank of Australia's international asset-management business Colonial First State Global Asset Management, or CFSGAM, which operates outside Australia as First State Investments. We estimate CFSGAM will add around 2% to MUFG's total profit starting in the year ending March 2020. We view it as incrementally positive news for MUFG, and reiterate our no-moat rating and JPY 797 fair value estimate, 18% above MUFG's current share price.

The cash purchase price of around AUD 4.0 billion values CFSGAM at 12.4 times EBITDA for the financial year ended June 2018 and 17.5 times pro forma net income. This is not particularly cheap in our view, but we see it as reasonable given CFSGAM's exposure to the growing Asian asset-management industry, where it is currently the third-largest firm by assets under management if Japan is excluded from the region and 10th largest in Asia-Pacific including Japan (the combined MUFG and CFSGAM will leapfrog Sumitomo Mitsui Trust to become the largest).

MUFG management has been clear for several years now that they have wanted to purchase a large overseas asset-management firm in order to address MUFG's relatively low exposure to the asset-management segment compared with other large global banks, but we think MUFG had shied away from doing a big deal until now owing to management's view that valuations in the industry were too expensive to buy. We see MUFG as being able to buy CFSGAM now without paying an excessive premium only because Commonwealth Bank of Australia had decided anyway in June to spin off its wealth-management and mortgage-broking business in order to refocus on its core lending business in the wake of several scandals that exposed the Australian bank to closer regulatory scrutiny. The parties expect the transaction to close in mid-2019 after they have obtained required approvals.

MUFG will purchase CFSGAM through its Mitsubishi UFJ Trust and Banking, or MUTB, unit, which it has repositioned as the entity managing the group's asset-management business both inside and outside Japan. In April 2018, MUFG moved MUTB's corporate-loan business out of MUTB into its main commercial bank, and simultaneously made Mitsubishi UFJ Kokusai Asset Management a wholly owned subsidiary of MUTB. Based on CFSGAM's revenue of AUD 988 million in the latest financial year, the revenue contribution from the asset management and investor services segment (which is slightly broader in scope than MUTB) should rise to 7% from 5% currently. Of the current 5%, about 1.5% comes from pensions, where MUFG is tied with Sumitomo Mitsui Trust for the top position with 23% market share each, 0.9% comes from MUFJ Kokusai, which is a top five player in mutual funds in Japan with a 9% share of assets in public investment trusts, 1.3% comes from global asset administration and 1.1% comes from investment trust administration and other trust business.

One question that this deal raises is what will become of MUFG’s 15% stake in AMP Capital, which MUTB acquired for AUD 425 million in 2011 at a higher multiple than the current deal. AMP Capital is the third-largest player in Australia’s fund market behind Macquarie and CFSGAM. MUFG’s public statement says that the “strategic alliance with AMP Capital continues to be an integral part of MUFG’s asset management strategy because AMP Capital is expected to play an essential role to provide competitive investment capability in the midst of increasing demand for various products” but we could imagine AMP, which holds the remaining 85% stake in AMP Capital, wishing to buy out MUFG’s stake now that the Japanese bank has purchased a competitor.