If the competition regulator refuses to allow Link Group's proposed acquisition of Pillar the company's "logical response" would be to engage the latter's fund customers directly, according to broker UBS.
Analysts led by Adam Lee said the Australian Competition and Consumer Commission's framing of the competitive landscape was likely to be a "key determinant" in its final decision.
The NSW government's planned $100 million-plus privatisation of superannuation management platform Pillar hit a snag on Thursday after the ACCC said a sale to Link was likely to substantially lessen competition. The ACCC outlined its concerns in a statement of issues on the proposed transaction.
"The detailed Statement of Issues appears to discount competition from in-house administered funds, specifically the retail fund administration platforms and their activities in administering 3rd party funds," Lee said in a note to clients. "As a result, the ACCC has opted to define Link's market share at ~80 per cent of outsourced accounts. If we consider these other areas of competition, we believe Link's market share is closer to 37 per cent of total member accounts (excl. SMSFs)."
UBS believes if Link is blocked from acquiring Pillar it could target its customers instead.
"Link has the capability and unit cost advantage to provide an attractive offering to these (Pillar) customers. Further, Link has successfully migrated almost 5 million Superpartners accounts onto its Aaspire platform over the last 12 months.
"Although a migration without the added control of owning the existing administration platform has its challenges, Link has demonstrated its capabilities with managing large customer transitions."
UBS has a "neutral" rating and $8.40 price target on Link.
"Our $8.40 DCF valuation for Link does not include any consideration for the potential ~$1 valuation upside presented by an acquisition of Pillar. However, we would expect some near term share price softness resulting from the ACCC's preliminary views."
In August, Link revealed that the ACCC was taking a look at its eligibility to buy Pillar. The ACCC is seeking further submissions and plans to deliver a final decision on 15th December 2016.
This column foreshadowed that rival bidders for Pillar including Mercer, Aon, Anchorage Capital Partners and Pillar's biggest customer First State Super, would benefit from any issues raised by ACCC.
ASX-listed OneVue Holdings was also involved in the auction, but the company's interest is said to have waned.
Pillar administers more than $100 billion in super and pension accounts belonging to about 1.1 million members.
The NSW government wants the sale wrapped up by the year's end.
