Leading superannuation software company Link Administration Holdings Ltd (ASX: LNK) was dealt a blow this morning when the Australian Competition and Consumer Commission (ACCC) released a Statement of Issues on its possible acquisition of the Superannuation Administration Corporation.
The Superannuation Administration Corporation, trading under the name Pillar, is a New South Wales state-owned corporation providing administration services to Government superannuation funds, pension funds, and defined benefit schemes.
At present Pillar administers more than 1.1 million superannuation member accounts, with assets totalling over $100 billion.
The state government intends on privatising Pillar and has commenced a competitive sale process with Link being one of a number of companies that has expressed an interest in acquiring it.
According to the ACCC 's Chairman Rod Sims, the ACCC has concerns that if Link acquired Pillar it would lead to a significant drop in competition for the supply of superannuation administration services "by entrenching Link's dominant position".
As Link and Pillar are the only two providers that currently service the larger funds, the fear is that this will ultimately result in either higher prices for fund members or lower service levels. According to the release:
"The ACCC is seeking to better understand the barriers to entry or expansion and the likelihood of new entry or expansion in the sector. Other issues include the extent to which insourcing superannuation administration services is a credible constraint on Link and the likelihood of self-administered funds providing administration services to other funds."
Link's management has responded this morning with a short statement advising that it is reviewing the Statement of Issues and believes it has a "compelling proposition for the State of NSW which would fully address the requirements of the enabling legislation and the sale process."
Adding an extra 1.1 million accounts to the 10 million superannuation member accounts that Link currently provides services to is likely to give its earnings growth a significant boost. So management will no doubt be working hard to satisfy the ACCC concerns in the coming weeks.
The market doesn't appear to be too optimistic that a deal will be reached judging by its reaction this morning. In early trade its shares are down by almost 3%. Going the other way and climbing higher though are industry peers Class Ltd (ASX: CL1) and Praemium Ltd (ASX: PPS).
Whilst I think Link is a fantastic company, at 40x full year earnings its shares are definitely on the expensive side. As a result if this acquisition doesn't get approved by the ACCC then I do feel its shares could potentially drop lower. So approach with caution at this point would be my advice.
