TA Associates' $1.15 billion acquisition of Russell Investments could be a bargain for the private equity firm, but is seen as well below offers the London Stock Exchange Group was receiving earlier in the bidding process, investment bankers said.
Boston-based TA, along with minority partner Reverence Capital Partners, emerged Thursday as the last man standing in an auction that had been dominated until recently by Chinese bidders.
That price was well below the $1.8 billion that CITIC Group had reportedly been considering before the sharp selloff on China's stock market starting in mid-June, effectively undermined its lead bidder status.
Bankers pegged the $1.15 billion price at less than seven times Russell Investments' earnings before interest, taxes, depreciation and amortization of roughly $165 million a year — a low valuation compared to the attractive multiple of more than 10 times the $1.8 billion CITIC deal would have offered.
Russell is being priced as a hodgepodge of globally located regional businesses with no overarching theme, a fairly accurate assessment at present, said Donald H. Putnam, San Francisco-based managing partner of investment bank Grail Partners.
Still, the business has the potential to become much more, said Mr. Putnam. If Russell can be hammered into a "well-led, well-coordinated, globally synchronized business," that $1.15 billion purchase price will look like a bargain, he said. And with an industry leader such as Reverence Capital co-founder and Managing Partner Milton Berlinski joining its board, such an outcome can't be discounted, he added.
That prospective upside, at least in part, could reflect the fact that a money management merger and acquisition veteran such as TA — with experience investing in managers such as Affiliated Managers Group, AIM Management Group, First Eagle Investment Management, Jupiter Fund Management and Numeric Investors — ended up crunching the numbers for the Russell prize.
Private equity bidders, for the most part, had fled to the sidelines after Russell was put on the block in February, as newcomers to the scene — including CITIC and Shanghai-based Internet game provider Shanda Interactive Entertainment — proved willing to entertain higher prices for the business.
LSEG was asking for $1.5 billion to $2 billion, which should have pointed to a final price closer to between $1 billion and $1.5 billion, but firms such as CITIC and Shanda were willing to talk about $1.7 billion or $1.8 billion, noted one investment banker, who declined to be named.
The fact that “China is a huge market to sell asset management product into” justifies a strategic premium, said one investment banker with a European financial group, who declined to be named.
And bankers said LSEG might have run the table if capital market conditions had remained bullish a little bit longer. But just as China's stock market was peaking in June, investment bankers confirmed that LSEG had settled on three final bidders: CITIC, Shanda and Towers Watson.
LSEG's experience proves the adage that “time is the enemy of M&A auctions,” amid all of the uncertainties that can complicate the task of holding a deal together, noted a New York-based investment banker, who declined to be named.
Starting in June, growing market turmoil in China sidelined Shanda and CITIC. Meanwhile, Towers Watson was taken out of the running by the announcement of its merger with Willis Group Holdings.
Some bankers insist the LSEG shouldn't be taken to task for how the auction turned out. Nobody could have anticipated the turn of events that derailed a deal with CITIC or Towers Watson, said a Hong Kong-based banker, who declined to be named.
Others are more critical. LSEG had ample opportunities to sell Russell at a decent price of $1.3 billion or so, but it went out on a limb — and wasted a summer — pursuing a deal with CITIC, apparently confident that the rosy stock market backdrop of recent years would go on forever, said the New York-based banker.
J.P. Morgan and Goldman Sachs advised LSEG and Russell on the deal, while Broadhaven Capital Partners advised TA and Reverence Capital. Barclays arranged the financing for the deal.
