The chairman of Hunter Hall International Ltd (ASX: HHL), Kevin Eley, today recommended shareholders reject Washington H. Soul Pattinson and Co. Ltd's (ASX: SOL) improved takeover offer of $2.60 per share for the remaining shares in the fund manager it does not already own.
Investment conglomerate Soul Patts has now accumulated a 44.2% stake in Hunter Hall at prices lower than $2.60 per share in large part by getting Hunter Hall's departed founder Peter Hall to sell his stake at prices far below the market value of the company.
Hunter Hall is now demanding that Soul Patts lifts its offer to $2.75 to $3.20 per share at what it says is an independent expert's estimated fair market value of the company.
At lunchtime on March 15 Hunter Hall shares are changing hands for $2.62 per share and its future is complicated by the fact that last week its board endorsed a merger with Pengana Funds Management via a reverse scrip takeover. It would see Hunter Hall acquire all the shares in Pengana in exchange for issuing 74.1 million shares in Hunter Hall to Pengana shareholders.
The fact that Hunter Hall has competing suitors is good news for shareholders who were initially left high and dry by its founder's decision to dump his holding at a huge discount to its market value.
Famed value investor Soul Pattinson is probably primarily interested in the business because of its cheap price as much as anything else because the active retail funds management space is facing increasing competition from low-fee and index-tracking exchange traded funds.
I'm not a buyer of Hunter Hall shares as it seems focused on the retail space, which offers higher margins (for now) than managing institutional mandates. However, the retail funds management space is likely to face continued disruption on a much great level than institutional money management.
Investors looking to make money over the long term in funds management need to look at managers that focus on winning and managing institutional mandates as this is a market that has traditionally been more lucrative than the retail space anyway. I expect the status quo to stay that way and would not buy shares in an investment manager focused solely on the retail space given the headwinds brewing in the sector.
A couple to consider heavily involved in the institutional space include Henderson Group plc (ASX: HGG), or my preferred choice Magellan Financial Group Ltd (ASX: MFG).
