Man Group caught the hedgie sector off-guard on Monday with an intriguing deal to buy institutional fund-of-funds specialist FRM Holdings.
It’s intriguing because Man seems to have acquired an extra $8bn of assets under management for the princely sum of nothing. Here are the terms, with this nugget:
No consideration will be paid up front. The contingent consideration to be paid over three years comprises i) a maximum of $82.8 million in cash, net of total net assets acquired (subject to post-closing balance sheet adjustments) and dependent on asset retention ii) a 47.5% share of performance fees attributable to FRM’s existing funds under management over three years, subject to a cap.
We’re told that the acquisition will be “double digit accretive” to Man’s management fee earnings next year and will generate annual cost savings of $45m across the combined group. But before we look at this in the context of Man’s well-documented problems (AHL), this ‘nil consideration’ aspect needs examining.
As Chris Turner and team at Goldman Sachs note:
This [price] compares to the post-Lehman average acquisition price for asset mangers of 1.1% and an average of 1.5% since 2001. Historically, alternative/hedge fund managers have tended to be acquired at premium valuations.
The delayed, performance-related consideration for FRM, is about 1 per cent of AUM.
So is this the new yardstick for the fund management industry, post-Volcker et al? 1 per cent, maybe.
Perhaps there are/were other issues with the FRM business that dictated the sweet terms. Or maybe chief executive Peter Clarke has become a fearsomely good negotiator after splurging $1.6bn on GLG two years ago.
Either way, investors seem happy with this latest deal. The stock was up 4.8 per cent at pixel time, having had a terrible year to date, down 37 per cent.
Analysts on the whole also seem to approve. The word “sensible” has come up quite a few times in the notes we’ve seen. They like the boost to Man’s (depleted) assets. The combined group will have around $67bn. It also reduces Man’s reliance on AHL, its computer-based fund that makes up almost a third of its AUM. It has been underperforming for the past couple of years…
From Gurjit Kambo et al at Credit Suisse:
The rationale for the deal is to complement the existing Man Multi Manager business (c$11bn AuM), whose CEO previously worked for FRM and knows the business well and is confident in being able to deliver on the $45m of annual cost synergies … We view the deal as incrementally positive with low execution risk.
The reference is to Luke Ellis, who joined Man in 2010 just after the GLG deal.
But David McCann at Numis argues the deal will do little to resolve Man’s real problems:
Overall this looks to be a fairly small, sensible deal that looks to be structured in a way that reduces risk for shareholders (receive net cash upfront, only pay out in future based on revenue retention). It will help, but still does not resolve, the reliance on AHL: last year Man generated c.$375m in annualised management fee PBT of which we estimate $260-300m was attributable to AHL. We believe AHL will continue to struggle in RoRo markets and is the main reason for our sell.
McCann retains his ‘sell’ rating:
Why Sell?: To invest in Man today, you ultimately need to believe that AHL will perform well over the next 1-2 years, allowing it to recover its poor 1 and 3 year performance numbers and preserve/improve its still reasonable 5 year record. To perform, AHL needs markets to trend for a sustained period of time, rather than a continuation of frequently gyrating “risk-on risk-off” (“RoRo”) markets with no ultimate trend. Given the number of global macroeconomic issues which are likely to remain unresolved for the next several years, we believe RoRo may persist for some time. As such, we conclude that AHL will continue to struggle and we think there is little that management can do to change this. We have departed from the rose-tinted analyst community consensus view that AHL is on the verge of returning to long run performance of 10-15% p.a. and therefore everything is about to recover. We believe Man is worth no more than its liquidation value, which we estimate as between 50-75p/share, depending on how bullish/bearish you are on the ability and timing to liquidate (the longer it takes, the worse things will get and the harder it will be to realise value). If your view however is that AHL is able to recover performance within the next couple of years, then our sell recommendation is undoubtedly wrong at this price. Regardless, we believe there is ultimately just too much uncertainty for anyone to reasonably predict the medium to long term earnings potential for AHL/Man today and thus we would not consider the stock investable, unless it were to fall well below liquidation value.
Re-engineering the multi-manager offer for a new era – The Hedge Fund Journal
Man Group replaces AHL’s head of risk – FT