Current price: C$2.62
Merger Consideration: C$2.57 + Residual Cash Balance + CVR
Upside: 3% + 10% (expected)
Expiration Date: Q2 2019
Fiera Capital is acquiring Canadian listed Integrated Asset Management (IAM) at C$2.576/share payable in cash and stock. On top of this base merger consideration IAM shareholders will get any residual cash balance distributed as dividends and CVRs that will pay out depending on performance of two IAM managed funds. All in all, shareholders are expected to receive the value equal to current share price as the base merger consideration and then any dividends + CVR (potentially 13% in value) would come in as free upside.
Merger is expected to close during Q2 with shareholder vote in May/June 2019.
Risk of transaction falling apart is very low. 62% of IAM shareholders (top management + other insiders) entered into support agreements. Acquisition makes sense for Fiera which will be able to integrated IAM operations (C$3.1bn in AUM) within Fiera’s wider portfolio (C$137bn AUM) achieving scale efficiencies. Fiera has been serial acquirer of smaller asset managers over the last few years (9 closed acquisitions since 2015) and IAM deal fits the pattern.
This opportunity is well covered here and I recommend reading through the post for any additional information or different assumptions re. the upside.
When I started looking at IAM it was fairly liquid (probably due to post-announcement volume) and traded somewhat lower, but over the last week liquidity dried up. Patience is required to establish even small position.
- C$1.932 in cash.
- C$0.644 in Fiera Capital shares. Exchange ratio will be determined by 5-Day VWAP preceding the closure. Hedging might be necessary when exchange ratio is known – at the moment borrow is cheap with plenty of availability.
- C$0.13 (estimate) in pre-merger dividends from adjusted cash balance in excess of C$10m. The definition of adjusted cash balance is outlined in Schedule D of the merger agreement and is basically net cash+receivables+investments less payables and any transaction related costs (severance, bonuses, change of control fees, any professional fees related to transaction). As of Dec 2018 IAM had C$17m of cash+receivables+investments less all liabilities (treatment of certain liabilities – like long term bonuses – is not fully clear, but most probably these will need to be paid out). Assuming transaction closes by the end of Q2, IAM is likely to generate additional cash of C$1.5m, bringing the total to C$18.5m. Now it is uncertain how much will need to be deducted for severance, additional bonuses and other transaction related fees – a conservative suggestion here offers using half a year salaries for this resulting in total of $5m of severance and closing costs. This brings us to $3.5m of expected excess cash or C$0.13/share.
- C$0.175 (estimate) in CVR payouts based on after bonus incentive fees from two IAM real estate funds maturing in 2021 and 2024. As of Dec’18 unrealized performance fees from these two funds stand at C$10.7m, employee bonuses are 25% of that (as per merger agreement) and various taxes might deduct another 10%, leaving C$7m for CVR distributions. Discounting this at 10% to today results in additional C$0.175/share in value. Incidentally, management decided to value CVR at C$0.174/share for tax purposes. These CVR payouts are highly dependent on the value at which real estate assets from these funds will eventually be sold and zero is clearly a possibility.
In short, upon close of the merger (Q2 2019) shareholders will receive current share price value in base merger consideration and potentially another 5% in excess cash dividends. A further upside of 10% might be realized from CVR payouts in 2021 and 2024.