So far, the London Stock Exchange Group appears to be preparing for an auction process, shopping the deal to nearly 100 potential buyers in hopes of gaining the highest offer possible. Sources say that LSE hopes to get $1.2 billion to $1.5 billion for the portions of Russell Investments' business it is selling.
Many observers mentioned New York money manager TIAA-CREF's acquisition last spring of Chicago-based manager Nuveen from private equity firm Madison Dearborn Partners LLC for $6.25 billion, estimated to be 12 times earnings before interest, taxes, depreciation and amortization.
“There is not a chance in hell that LSE will get 12 times EBITDA,” said investment banker Donald H. Putnam, managing partner, Grail Partners LLC. Russell would likely attract eight to nine times EBIDTA for the businesses, Mr. Putnam said.
Russell's investment management unit had 2013 EBITDA of $153 million (disclosed by LSE at the time of the acquisition), an earnings multiple of eight to nine would mean a valuation of between $1.2 billion and $1.4 billion.
A ceiling of $1.5 billion makes sense to some experts interviewed for this story.
“Any more than that and I would be surprised,” said Peter Lenardos, London-based analyst at RBC Capital Markets. “If I were the acquirer, I would be considering the suboptimal operating profit margin at Russell Investments. I'd look at if I could find synergies, improve the operations, strip out costs ... and I would get access to 250 key institutions in the U.S.,” he said.
It is also worth considering what LSE has done by separating the units. LSE paid $2.7 billion for Russell Investments. The business comprises the unit that is up for sale - which has $275.1 billion of assets under management — and the part that LSE is keeping: the index business. Russell's U.S. indexes have $5.2 trillion of assets benchmarked to them. When LSE announced the acquisition in June 2014, it said a deal would bring together Russell's indexes and its own FTSE unit, creating an index titan. LSE also highlighted the foothold it would gain in the U.S.
“For the LSE to keep the (asset management) business would have been a confusing strategy,” said Mr. Lenardos. “There is also an aspect of proving to the market that (LSE) can create value from separating the assets.”
Whatever the price, Mr. Lenardos expects a relatively quick sale, since the assets are separate and the bankers are in place. He put a potential timeframe on a sale announcement of “within the next two months.”
