Rabobank's trouble selling Robeco could dissuade other sellers
Rabobank's prolonged attempt to sell Robeco Group indicates more trouble ahead for European asset management divestitures, wrapping up a year that so far has been more defined by failures than successes.
Unless an agreement to sell an asset management business at a fair price is announced soon, other potential vendors will be reluctant to put their businesses on the auction block, bankers said.
Even in transactions unrelated to banking divestitures, market uncertainty is helping to alter the asset management M&A process itself. “Everything is slower and more protracted, reflecting more caution by both buyers and sellers,” said Baber Din, director of the investment management mergers and acquisitions team at Deloitte LLP, London.
Increasingly, a portion of the payment may be deferred, typically dependent on performance or future growth of the business. In addition, a minority stake is left with management in perpetuity to better align interests, sources said. Previously, acquirers were likely to purchase management's stake over time.
Kevin Pakenham, co-founder of Pakenham Partners Ltd., London, a boutique M&A advisory firm, added: “We're seeing more interest in partial sales and partial acquisitions.”
One such deal was Sumitomo Trust & Banking Co. Ltd.'s 40% acquisition of London-based equity and credit investment management boutique NewSmith Capital Partners earlier this year. Mr. Pakenham's firm advised NewSmith, whose employees own the remaining 60%. Such transactions are increasingly viewed as “safer for both parties,” Mr. Pakenham said. “One may bring distribution (capabilities), and the other specialist investment skills.”
Another example was Societe Generale SA's announced sale of TCW Group, Los Angeles, to TCW management and The Carlyle Group LP, Washington. The transaction ultimately doubled the proportion of the equity owned by management to 40%. However, in a subsequent legal challenge to the planned acquisition, EIG Global Energy Partners LLC, Washington, won a temporary injunction that could block the transaction. Earlier this month, U.S. District Court Judge Christina Snyder in Los Angeles issued the order pending further evidence submission.
In the first three quarters of 2012, 38 transactions valued at $3.4 billion, with total assets under management of $336 billion, were announced in which targets are based in Europe, Middle East and Africa, according to data from Cambridge International Partners, a boutique investment bank based in New York. That's down from 44 deals valued at $4.9 billion with aggregate $349 billion during the same period last year. Cambridge International data excludes transactions of less than a 10% ownership stake or those involving managers with less than $200 million in AUM.
“There has been significantly reduced activity in Europe so far this year,” said John H. Temple, managing director of Cambridge International. This year is shaping up as “certainly the worst year” in the past several years for European asset management M&A.
Globally, there were 94 transactions in the first nine months of the year, including only 13 deals involving money managers with more than $10 billion in AUM, according to data from advisory firm Freeman & Co. LLC, New York. In comparison, there were 112 transactions with 27 deals involving managers with the same asset range last year. Freeman & Co. reports transactions involving targets with AUM above $500 million.
“It's a challenging time to be making a big bet on asset management,” according to a banker who advises on asset management M&A.
Among the most notable deals that didn't happen in 2012 were the attempted sale by Deutsche Bank AG, Frankfurt, of its asset management business and the decision by UniCredit SpA, Milan, Italy, to abandon pursuit of a buyer for Pioneer Investments.
Asset management M&A in 2013 isn't solely going to be about banking divestments, Deloitte's Mr. Din said. “Among large asset managers, the ones we speak to are absolutely looking at M&A as part of their tool kit for growth. However, they are more focused and strategic about it. The opportunities generally fall into three buckets: expansion of their product range; expansion of their geographic footprint; and building scale.”
Acquirers are willing to pay a premium for “fill-in transactions,” in which buyers look for specific products to strengthen their own offerings, Mr. Pakenham said. Managers of “commodities products” such as exchange-traded funds also will continue to attract demand, as will specialist boutiques, he added.
No good fit
In the case of Robeco, which had e188 billion ($240 billion) in assets under management as of Sept. 30 spread throughout many different lines of products and 14 countries, the entire business doesn't readily fit any one strategic buyer, according to sources familiar with the deal who asked that they not be named. “It's difficult for buyers to get their arms around the whole thing,” one banker said.
Private equity bidders have dropped out largely because it has become more difficult to compete with strategic buyers on price given the effects of leverage and the risk/return demands of private equity investments, sources said. In addition, Rabobank is looking for an all-cash deal, which is more difficult in the current environment.
“Unless (a private equity buyer) already owns other asset management businesses, it won't be able to price in synergies where a corporate buyer can,” Mr. Din said. “In addition, private equity funds have a hurdle rate in terms of (the internal rate of return), so it means that they will struggle to pay significant sums compared to corporate buyers who are not trying to turn around a double-digit IRR but are satisfied with a strategic fit that is earnings-accretive.”
Meanwhile, Rabobank's negotiations with Orix Corp., a Tokyo-based financial services group, and Australia's Macquarie Group Ltd. are continuing amid skepticism whether the right price can be reached. Valuations for the whole business have averaged between $2.5 billion and $3 billion.
“I do not see a natural transaction for the entire business,” according to one banker who is familiar with the deal. Expected to have reached an agreement in October, Utrecht, Netherlands-based Rabobank may follow Deutsche Bank in deciding to keep its fund management business if it can't sell at the right price, sources said.
In 2012, potential buyers of asset management companies had presumed “a massive fire sale at bargain prices” as European banks divest non-core assets, Mr. Din said. But as non-core businesses within banks that utilize a lot of capital, asset management divisions are typically not at the top of the list. As a result, some banks reconsidered and decided “the price vendors are willing to pay (for the asset management divisions) mean their disposals are not a silver bullet to solve their (capital ratio) problems,” he added.
While pricing was a big stumbling block in the cases of Deutsche Bank and UniCredit, other asset management businesses that were viewed as being offered at rock-bottom levels also suffered from a lack of potential suitors.
In the sale of Brussels-based Dexia Asset Management, parent company Dexia SA has not reached a deal with Beijing-based private equity companies Hony Capital Co. Ltd. and GCS Capital following months of negotiations that was expected to have already been completed, according to sources familiar with the case. Dexia Asset Management, which had e78.8 billion in AUM as of June 30, is being sold as part of the conditions set by a government bailout of the bank.
“Cross-border transactions were hampered by market uncertainty and in particular uncertainty around the eurozone, in terms of transactions related to banking divestments,” Mr. Din said.
This article originally appeared in the November 26, 2012 print issue as, "Rough European M&A road is seen getting bumpier".