Inside Money: Why NZ Post paid $58m for Gareth Morgan

9:30 AM Tuesday Aug 28, 2012

As a reporter it's nice to be on the money, which, as the recent NZ Post results reveal, I was.

The NZ Post figures, see page 32 of the financial disclosure documents, confirm my estimate (see, it wasn't a wild guess) that the Gareth Morgan Investment (GMI) business sold for around $50 million.

In fact, NZ Post, via a newly-created entity called Kiwi Wealth Management, could end up shelling out as much as $58 million for GMI. The government-owned business paid $43.5 million upfront to GMI with the remaining payment contingent on "future performance milestones, including the level of Funds Under Management [FUM]".

In the document NZ Post also explains its rationale for buying GMI, which includes the $700 plus million KiwiSaver scheme and another similar amount in individually-managed investment portfolios.

"The acquisition is expected to provide the Group with an increased share of the wealth management market through access to the GMI customer base," the NZ Post report says.
"The Group also expects to reduce costs through economies of scale."

As previously reported, one of the group's first cost reduction exercises will be to fold the NZ Post's subsidiary KiwiBank KiwiSaver scheme, currently managed by AMP, into the GM KiwiSaver.

Does $58 million represent good value for the New Zealand taxpayer? As I recall, GMI claimed a total funds under management at the time of sale in March of about $1.5 billion, which as a ratio of the full sale price (assuming GMI comes good on the work-out provisions) is about 3.8 per cent of FUM - that sounds about normal for the industry.
(By contrast, in the only other KiwiSaver transaction where costs have been publicised, Fisher Funds paid about 10 per cent of FUM for the Huljich scheme - or almost $20 million for about $200 million of FUM.)

According to the NZ Post figures, GMI has already generated about $3.6 million of revenue in the three months since the end of March, resulting in $1.2 million in net profit after tax.

"Had this business combination been effected at 1 July 2011, the revenue of the Group continuing operations would have increased by approximately $14.4 million, and the profit for the year from continuing operations would have increased by approximately $4.8 million," the NZ Post report says.

If you assume about half of that was made from the KiwiSaver scheme (probably not a great assumption), then for the first time we're getting some real insight into how well providers are doing out of the scheme.

On the face of it $2.4 million profit earned on roughly $700 million of FUM doesn't seem excessive but from here on in, with costs already sunk and the automatic magic of KiwiSaver flows set to continue, those margins should widen.