Insignia bidding war highlights firm was ‘undervalued’: Morningstar

On Monday, Insignia announced that CC Capital had made a non-binding indicative proposal to acquire 100 per cent of the company for $4.30 per share.

The offer is 7.5 per cent higher than the $4.00 originally offered by Bain Capital in December and would come in at around $2.9 billion in total.

Insignia said it is “considering the proposal” to assess if it is in the best interest of shareholders and that there is no certainty it will result in a transaction proceeding.

The firm’s board had rejected Bain’s takeover bid on the grounds that it “does not adequately represent fair value” for shareholders.

“The Insignia Financial Board believes that, based on its view of the fundamental value of Insignia Financial, the proposed transaction does not adequately represent fair value for IFL shareholders in the context of a change of control transaction and that it is not in the best interests of IFL shareholders to engage with Bain Capital in relation to the indicative proposal,” Insignia said at the time.

According to Morningstar equity analyst Shaun Ler, the larger CC Capital offer “vindicates” the firm’s view that Insignia was undervalued, noting that Morningstar believes its “earnings outlook is brighter versus its 2023–24 levels”.

“The firm is recovering from past headwinds that hurt its ability to attract and retain client assets and improve profitability,” Ler said.

“These include the royal commission in 2018 and sharp rate rises of 2022–23. Margin expansion prospects are improving, driven by restructuring initiatives such as migrating client funds to more efficient platforms, reducing non-essential costs and an expected recovery in fund flows from cyclical lows.”

According to Morningstar, the new “fair value estimate” for Insignia is $3.95 per share, up from its previous number of $3.60, which Ler said reflected an “equal-weighted probability of Insignia being acquired by CC Capital or staying stand-alone”.

Both are considerably higher than what the firm was trading at prior to the takeover attempts started, with Insignia shares having climbed 35 per cent from $3.06 at the start of December to its current price of $4.10. It is also up around 15 per cent from $3.54 prior to CC Capital’s bid.

“CC Capital’s bid is 21 per cent and 19 per cent above Insignia’s pre-announcement trading price of AU$3.54 per share and our stand-alone fair value estimate of AU$3.60. Bain’s rejected bid was a modest 11 per cent premium to our stand-alone fair value,” Ler said.

He added: “Insignia outlined several growth initiatives at its November 2024 investor day, endorsed by majority shareholder Tanarra Capital, which owns about 15 per cent of Insignia. The firm has stated it wants Insignia to execute on its own growth plans, when commenting on Bain Capital’s proposal. But the takeover premium is now higher.”

According to Ler, Insignia’s board would be deciding whether or not to engage with CC Capital on the deal and “weighing up the upside from stronger earnings against execution and market-related risks”.

“On the one hand, Insignia’s earnings momentum is improving, marked by ongoing cost reductions and recovering product flows. On the other, the firm faces several execution risks,” he said.

“These execution risks include required transformation investments, a potential increase in remediation payments and competitive pressures from faster-growing platforms like Netwealth and Hub24.”