What would a takeover mean for Hargreaves Lansdown?

Even after growing to be one of the largest businesses in the UK it retained its headquarters in Bristol, but with the news that the board of directors of the company has decided to recommend a £5.4bn takeover offer from a consortium of private equity funds, what does the future hold, and what will the tentative new owners get for their money?

The first thing to point out is that while Peter Hargreaves and Stephen Lansdown remain substantial shareholders in the company (20 per cent and 6 per cent respectively), neither are on the board of directors and neither have committed to selling their shares as part of this takeover offer.

Indeed, the bidders have given them another option: some shareholders can, if they wish, instead of taking cash for their shares, transfer their investment into the private equity vehicle that will buy the company. 

In this way they can still benefit from any future rise in the value of Hargreaves Lansdown, despite not being direct owners of the company. 

Neither Hargreaves nor Lansdown have indicated at this time if they wish to take that opportunity.

Not that many years ago Hargreaves really did dominate this space.

Mike Barrett, The Lang Cat

The fact the two founders have a combined 26 per cent stake may also be significant, as under UK company law owners with 75 per cent or more can pass special resolutions about how a company is run, but without the shares of the founders, the new owners cannot reach that level.

While several existing shareholders, including Lindsell Train, have remained silent about their intentions, Lancaster Investment Management has been vocal. 

That company owns 1.9mn Hargreaves Lansdown shares and has written an open letter to Hargreaves Lansdown chair Alison Platt, querying the board’s acceptance of the deal, specifically referencing the valuation and the fact that not all shareholders are being given the option to invest in the private equity fund.

James Hanbury, portfolio manager at Lancaster, wrote: “1140p (including final dividend) represents a multiple of [circa]17x earnings per share on our calculation, which is a [circa] 14 per cent discount to AJ Bell's multiple, as the closest listed peer, currently valued at [circa] 20x earnings per share. 

"It is [circa] -40 per cent below HL's own 10-year average PE multiple of 28x on our calculation – HL has only sustained at a lower multiple than that implied by the offer for a brief period during the 'Global Financial Crisis' 2008-09, and over the last [circa] two years, since early 2022 when we would argue HL's problems combined with global geopolitical and macro-economic upheaval to affect the valuation multiple.”

Hanbury added in the letter that while the company has problems in a number of areas, they are all within the capacity of the company to fix, and that by fixing them the valuation of the company would rise, therefore in his view it would be better for shareholders if the sale did not happen at this point and the company addressed the issues. 

With regard to the arrangement whereby certain shareholders can invest in the private equity vehicle after the takeover, funds – such as most of those in which FT Adviser readers are invested – will not be able to as they are not permitted by regulators to own unquoted assets.

Hanbury says this creates a “two tier” offer, and will incentivise some shareholders to accept the deal, but also some of the board members may be able to invest in the private equity vehicle and there is the potential for this to create a conflict of interest for the board members that recommended the deal. 

A Hargreaves Lansdown representative declined to comment on the letter. 

Prior to the latest bid being announced, another shareholder, Hugh Yarrow, who runs the Evenlode Income fund, said many of the issues that have hurt Hargreaves Lansdown’s performance in recent times have related to the health of stock markets and economies, and have not dented what he says is the quality of the Hargreaves Lansdown “franchise”.

Ben Williams is a director covering financial services businesses at Hannam and Co, an investment bank. He shares Hanbury's view of the merits or otherwise of the ability of some shareholders to roll their stake into the private equity vehicle. 

But he is more sceptical on the valuation. He says that while the takeover price implies a cheaper valuation than the current valuation to which AJ Bell, a a peer company, trades, such a difference in valuation multiple may be justified by the fact that AJ Bell is growing at a faster pace than Hargreaves Lansdown.

Under the bonnet  

The quality of the Hargreaves Lansdown businesses is something that has been on the mind of Mike Barrett, consulting director at the Lang Cat. 

Data from Fundscape shows that at the end of March 2024, Hargreaves Lansdown had assets under administration of £132bn, comfortably ahead of its nearest rival in the direct-to-consumer space, AJ Bell, with £76bn.

Barrett says the landscape has changed: “Not that many years ago Hargreaves really did dominate this space, there was only it and Interactive Investor. There is more competition now of course.

"One of the things which became part of Hargreaves USP was the quality of the service; if you phone them you get an answer quickly. I do wonder if that will last under private equity ownership. Hargreaves – in terms of charges – for fund charges they are quite expensive, but for trading ETFs or investment trusts are quite cheap.

"The key is that their client base tends to be very sticky, they don’t tend to buy and sell investments a lot, they are buy-and-hold investors. I do think there is a risk that being owned by private equity could dent Hargreaves Lansdown’s image.” 

One challenge for any new owners is that Hargreaves Lansdown’s core business is very mature. 

Barrett notes that the potential of this revenue stream has been spotted by Hargreaves management, as they have launched a cash management product, which allows clients to place cash with a range of selected banks on the platform and achieve a higher interest rate than might be achievable in a savings account.

This is because Hargreaves pools all of the clients money together and, by having such a large deposit to make, negotiates very high interest rates with banks. 

Barrett said this product has been very successful.

Peel Hunt analyst Stuart Duncan says Hargreaves Lansdown has a market share of about 40 per cent. His target price for the stock is £12.20, higher than the price of £11.40 that has been accepted by the Hargreaves Lansdown board. 

He says: “We still see significant  potential for the platform market to grow in the coming years, with estimates suggesting that the majority of assets are still held off-platform.”

The private equity consortium has until July 19 to formalise the offer or walk away.

David Thorpe is investment editor of FT Adviser