Why a Fund Giant Set the Lawyers on a Client

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(Bloomberg) -- When Lloyds Banking Group Plc announced that its Scottish Widows unit was pulling 109 billion pounds ($147 billion) of assets from Standard Life Aberdeen Plc, the fund manager was quick to downplay the financial significance of the withdrawal.

So why has SLA called in the lawyers in what looks like a last-ditch effort to retain the business? Because in asset management, size matters more than anything else.

SLA said on Tuesday it disagrees with Lloyds's February interpretation that the two companies are in "material competition," the reason the British bank gave for terminating the agreement. Lloyds, for its part, has argued that financial and retirement planning is a key growth area, and that it clearly competes with SLA for that business, as well as in insurance. The bank responded on Tuesday with a statement that it is "disappointed" by SLA's actions.

The business from Lloyds's Scottish Widows operation isn't hugely profitable for SLA. It accounted for just 129 million pounds ($174 million), or about 4.4 percent, of revenue in 2017 and its absence will only ding profit by about 5 percent. It generates average fees of about 13 basis points, less than the 53 basis-point average for SLA's U.K. pensions and savings business.

The size of the mandate, though, matters more than its P&L implications would suggest. At 655 billion pounds at the end of last year, SLA's assets under management were within touching distance of what Co-Chief Executive Officer Martin Gilbert has dubbed the $1 trillion club. Without the Scottish Widows money, he's much further away.

That will do more than dent Gilbert's pride at building Europe's biggest independent asset manager after strapping Aberdeen together with Standard Life last year. Amundi SA may be bigger, with 1.45 trillion euros ($1.7 trillion) of assets -- but Credit Agricole SA's 70 percent stake arguably makes it a division of the bank, albeit one with its own stock exchange listing.

At some point, Gilbert will almost certainly seek to bulk up again by adding to the 40 or so deals he's engineered during his career. About 70 percent of SLA's assets are in the U.K.; the bigger its assets under management, the more clout it can wield in any effort to buy a U.S. or Asian asset manager.

In February, Gilbert expressed hopes that his firm would hang on to the mandate, optimism that turned out to be unfounded. The decision to take the legal route to retaining the business smacks slightly of desperation. But if it succeeds in keeping the assets on the books until the contract’s scheduled end in March 2022, maybe it will prove to have been a worthwhile gamble.

©2018 Bloomberg L.P.

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