BrightSphere Investment Group (BSIG) – Expected Tender Offer – 30%+ Upside

Current Price: $26.18

Target Price: $34.00

Upside: 30%+

Expiration date: Q4 2021 – Q1 2022

This idea was shared by Alan.

 

Summary

BrightSphere Investment Group is an asset manager 25% owned and chaired by John Paulson, billionaire hedge fund manager of the GFC fame. The company is currently in the process of transferring from a multi-boutique asset manager business model to a single focused manager, has already sold 5 out of 7 of its affiliates, and the sale of the 6th is expected to close this quarter (Q3’21). Following these divestitures, BSIG will remain with its flagship quant asset manager Acadian and with more than half of the current market cap in cash – $15.8/share gross and $10.9/share net. The company expects to pay down some of its debt and return the remaining cash to shareholders. Thus, in a few upcoming months, we can expect a very large, potentially up to 40%-50% tender offer or a special dividend. The remaining business, Acadian, now trades at around 6x normalized adj. EBITDA, whereas the two other much smaller affiliates were sold at 16.4x adj. EBITDA and around 9x adj. EBITDA. Given that Acadian is BSIG’s largest and most profitable asset and that the previous multi-boutique discount overhang should be eliminated soon, the current valuation of 6x normalized adj. EBITDA looks way too low, especially for an asset manager chaired and owned by John Paulson. I would expect the company to re-rate with the upcoming capital return. A more reasonable but still conservative 9x adj. EBITDA multiple translates into a $34/share target price and 30% upside from the current prices.

Management also seems open to selling the Acadian business as well but apparently hasn’t found the right partner yet. Such an event would potentially result in an even faster and higher upside from this investment.

 

Short background

BrightSphere Investment Group was previously known as OM Asset Management until the rebranding in 2018. It used to be a holding company with majority stakes in several different asset management companies with the remaining stakes owned by managements of those companies. After the rebranding, BSIG had 7 affiliates and then started divesting them in July’20. Subsequently, after 1 year the company sold off all of the businesses, except for Acadian. Interestingly, management called this a transfer from the multi-boutique business model, however, certain comments during the last two conf. calls hinted that Acadian was also up for sale and they are still open for a deal. Q2,21 call:

Analyst
Okay and then just a follow-up I had was Acadian on the list of things you’d take calls on, meaning is it just — you haven’t found the right partner, the right price yet or is it that tax potential liability that is just still laying the conversation. In other words, is this just a matter of time.
CEO
We’re very happy with the business, it’s a scale business in a very differentiated areas and it’s a great team, great track record to serve their clients very well. So, we think it’s a very good business for the public markets and we’re happy to keep going. At the same time, we’ve always maintained that it is our fiduciary duty to our shareholders that to the extent there was a party that was really able to award our shareholders, we would consider it.

Q1,21 call:

CEO
And as we’ve said to the market and our shareholders that we — our primary focus is fiduciary duty to maximize shareholder value. And we have a good plan, and our Affiliates are strong businesses and that generate really good cash flow. So we don’t necessarily have to do anything, but we do — as a result of our public stance that we are open-minded and have a fiduciary duty to maximize value, we do get inquiries from time to time, and we review them along with the teams. And if there’s anything, anything of interest, we discuss further. So that’s generally how we’ve been approaching things.

 

The remaining and disposed business segments

The 7 affiliates are/were grouped into reportable segments:

Quant & Solutions:

  • Acadian Asset Management – quantitative strategies to institutional clients. AUM used to hover below $100bn, however, increased over the last two quarters of 2021 due to market appreciation and now stands at $118bn. Historically, Acadian generated around half of BSIG revenue and adj. EBITDA. Performance metrics are not provided, except that 87%, 82%, 85%, and 88% Acadian strategies by revenue beat benchmarks over 1, 3, 5, and 10 year periods.

Alternatives:

  • Campbell Global – investment manager focused on forestland. $4.7bn AUM. The sale is still pending and is expected to close in Q3’21. Terms were not disclosed.
  • Investors Counselors of Maryland – value-driven equities with an emphasis on small and mid-cap companies. $3.2bn AUM. Sold in July’21. Terms not disclosed.
  • Landmark Partners – specializes in secondary market transactions of private equity, real estate and infrastructure investments. $18.4bn AUM. BSIG’s 60% stake was sold to Ares Management in June’21 for $724m in cash for the after-tax proceeds of $630m. In the conference call, BSIG unveiled that the sale was done at 16.4x EV/adj. EBITDA multiple.

Liquid Alpha:

  • TSW – value investments in US, international equities, fixed income and alternative investments. $22.3bn AUM. 75.1% stake was sold to Pendal in June’21 for $254m cash and after-tax proceeds of $196m. By my estimates, it was sold at 9x adj. EBITDA.
  • Investors Counselors of Maryland – value-driven equities with an emphasis on small and mid-cap companies. $3.2bn AUM. Sold in July’21. Terms not disclosed.
  • CopperRock – small/mid-cap strategies in international and global markets growth equities. $3.9bn AUM. The sale was announced in July’20. Terms were not disclosed, except for the after-tax proceeds of $15m.
  • Barrow, Hanley, Mewhinney & Strauss – value-oriented equity strategies. $51.7bn AUM. 75% stake sale was also announced in July’20 for $363m. The company utilized some deferred tax assets for after-tax proceeds of $320m.

Segmentation and lack of data on certain disposals makes it virtually impossible to track down valuation multiples for the remaining affiliates. For the TSW, some information was disclosed in the Q1’21 presentation “Segment Information” slide as TSW was the only remaining business in the Liquid Alpha segment (also confirmed by management on the conference call) form which I deduced 9x adjusted run-rate EBITDA valuation multiple. The company also confirmed this on the conference call.

 

Comments on the capital return

After closing Campbell sale (the last currently outstanding deal), the company expects to have cash on hand (after tax) at around $1.3bn. The company also has around $400m of debt for a net cash position of $900m. Management made numerous comments on intentions to use the cash to return capital to shareholders. Q2’21 call:

Thanks, Rob. Yes, on the first question. You’re right, we still have not finalized our action plan decisively around the capital. It’s a rather large amount of capital. So, we continue to tinker. However, as we have said, high level it is for debt pay down and returning capital to shareholders. And in terms of sequencing, yes, we plan to at least pay the retail notes of $125 million first before returning capital to shareholders. But, yes, there is — it’s — at least that part is straightforward. Yes, I agree, we just want to execute the entire plan more holistically.

Q1’21 call:

Closing the Landmark sale later in the second quarter would provide us another $630 million after-tax. So that provides us ample capacity to deleverage substantially as well as return capital to our shareholders.

[…]

once that capital is fully in the bag, it will be easier to have a holistic view and execution at that point rather than tranching it and doing a little bit now without having the second part fully executed. But in terms of priorities, those are the uses essentially, deleveraging and returning capital to shareholders.

Q4’20 call:

We continue to evaluate as to what the best use of capital is, but returning capital to shareholders remains our priority in the top news. And then as I mentioned earlier, we are also looking into using some of the proceeds to work potentially towards little bit more de-leveraging. So couple of ways we could do with that is repurchases. We are monitoring the market. There is a lot of volatility. So we will see what the right timing maybe. We do have a bias toward using up the capital sooner rather than later. You could also consider 1x special dividend for example. We are thinking through that so more to come in the next call it month or a couple of months on that but essentially the return of capital to shareholders being the primary use and maybe a little bit more de-leveraging.

 

Acadian valuation

At the moment the company has $2.1bn market cap with $900m pro-forma net cash for an EV of $1254m. Acadian’s most recent adj. EBITDA (Q2’21) was $53m for a run-rate of $212m. BSIG’s financial reports are a bit vague in regards to the corporate overhead figures, but these seem to be included in the ‘Other’ segment which also covers already sold ICM and Campbell operations:

Management has made multiple comments that going forward we should consider the $53m quarterly adj. EBITDA as the “right” run-rate for the remaining business. Q2 call:

Yes, so we’re really focused on the Quant & Solutions segment, which is Acadian and yes, that’s the $53 million is the right run rate in the ballpark. Of course, quarter-to-quarter there are some things that happen $1 million or $2 million seasonal items. But that’s about the right run rate for Quant & Solutions. […] So, over time, we would expect more efficiency in handling public company costs, so that the full Acadian EBITDA of $53 million and going from there goes to the shareholders

[…]

Analyst
Great, thanks. So, maybe just a quick follow-up there, just on the other segment. I guess, what can we expect near-term into 3Q and 4Q for that sort of corporate overhead and then what sort of timeframe would it take for that to get, I guess, in your view eliminated where you basically kind of get really closer to that $53 million, what sort of actions have to be taken and how realistic is that as a public company to really achieve that?

CEO
Yes. So, in 3Q we would have a month of ICM and we would have probably one quarter of Campbell, but 4Q is when the — when you would really just see the headquarter costs, which was in that $20 million ballpark and we’ll continue to whittle it down over time. It’s not a quarter or two, it’s probably longer than that, but it’s as Acadian continues to scale, there would be more that we can do on the other side. But yes, over time, we would expect that continues to get smaller and smaller.

From a more conservative perspective, $53m was somewhat elevated due to general market appreciation leading to higher AUM and $5m performance fees attributable to Acadian (although management notes that this level of quarterly performance fees is the average). Excluding performance fees still leaves $192m normalized adj. EBITDA figure and a 6.5x multiple. Even if AUM deteriorates back to 2020 levels and the company delivers quarterly adj. EBITDA of $40m (2020 average was $36.8m), the business is still trading at 7.8x adj. EBITDA multiple. So overall, no matter how you put it, there seems to be a sufficient margin of safety, considering that Landmark was sold at 16.4x EV/EBITDA. Historically, Acadian had significantly better adj. EBITDA margins than the Alternatives segment – 38%-46% for Acadian vs 22%-30% for Alternatives (the absolute majority of which was likely generated by Landmark as Campbell is much smaller).

There is also a question of corporate overheads – management hinted to a figure of $20m (my understanding annually), expected to decline gradually. So these have minimal impact on the valuation of the core business with c. $200m in annual EBITDA. Also in the Acadian acquisition scenario corporate overhead could be eliminated, resulting in an even more favorable valuation multiple for the potential buyers (Q2  call):

Also, if there were ever to be an acquisition in that scenario, a buyer would not need the public company costs. So, for those reasons we don’t really view these costs in the other as core and are really from a management perspective much more focused on the EBITDA that’s produced by our operating business.

 

Major shareholders

Management owns 27.6%, which includes 25.2% owned by the chairman John Paulson. John Paulson is an American billionaire and highly regarded hedge fund manager, who earned his fortune during the GFC. Paulson became the shareholder of BSIG in Nov’18 after buying a 22% stake from the Chinese conglomerate HNA Group at around half the current market price.

51 COMMENTS

  1. fishwithwings

    Thanks Alan. Are there any good comps I can refer to? Historically, the stock traded between 6-8x EBITDA. If Acadian isn’t sold wouldn’t today’s price be only slightly undervalued given the current market cycle?

    1
  2. Writser

    In case of a transaction materializing EV/AUM is perhaps another (or even more useful?) metric of comparing asset managers, as the acquirer can probably slash a lot of overhead. Pro forma EV/AUM in this case would be around 0.95% (?). WDR was recently taken private at 1.3% (again, just at a quick glance, maybe I am off). No idea about the quality of either WDR or Acadian – perhaps there are better comps.

    Thanks for bringing up an interesting idea.

    2
  3. jwestern

    Could you clarify the summation of insider ownership? Looks to me like the insiders own 24,743,083 shares (a bit over 31%).

    1. Lukas

      You’re correct, now it’s around 31%. The table in the write-up seems to be from April’s proxy.

  4. Alan Alan

    Campbell’s sale closed on the 31st of August. We should hear about the upcoming capital return plan shortly.

    “With the completion of the sale of Campbell, BrightSphere’s sole business is now Acadian Asset Management, with AuM of $118 billion as of June 30, 2021, which has been generating outperformance across multiple time periods through its quantitative strategies and solutions. As of June 30, 2021, 87%, 82%, 85% and 88% of Acadian’s strategies by revenue beat their benchmarks over the prior 1-, 3-, 5-, and 10- year periods.”

    https://ir.bsig.com/investor-relations/news/news-details/2021/BrightSphere-Investment-Group-Inc.-Completes-Sale-of-Affiliate-Campbell-Global/default.aspx

    1
  5. Bdjohnso

    “Expect capital deployment in Q4 2021 to include share repurchases of more than $1 billion”.

    Wow! That is more than 44% of total fully diluted shares outstanding at current prices. How can they possibly repurchase that many shares in the 2 months remaining in 2021?

    1. snowball

      A tender offer is likely the format for repurchase of such scale.
      Anyway, someone would certainly ask management to clarify during the 11am conference call today.
      However, not seeing any pop in pre-market trading.

      1. Grayson

        Management just confirmed on the call that it will be through a tender offer given the size of the repurchase.

        1
      2. R

        For users that have participated in tenders of this scale previously, what sort of EBITDA multiple or market premium do you believe would be required to find $1bn+ of tender offer participation?

    1. snowball

      Paulson’s plan to tender and to reduce his stake from 25.2% to below 19.9% is a negative.
      Even if he does not participate and everyone else tenders 100%, his stake will increase to just above 43%, quite normal a number for a controlling shareholder.
      So his decision to tender cannot be explained by not wanting too dominant a controlling stake. He likely believes that BSIG is fully or fairly valued at $31.5.
      On the other hand, with such a large tender (42% of shares outstanding), a tender price that is not over-valued (using the write-up’s target of $34 as fair value estimate), and a relatively liquid stock (anyone who would like to exit can also exit outside a tender), I think proration can be very high.
      So we are well protected if our cost basis is below $31.

      1
      1. ccppfw

        On the other hand, Paulson is going through a divorce. The tender could be related to that. In the conference call, mention was made that major shareholders pushed back on the special dividend, preferring a tender offer. Also, the tender was quicker and more tax efficient.

    2. Terence

      Correction to my note above: price remained at about $30+ (not $31), after the Nov 4 tender news.

  6. Grayson

    Also important is the odd lot provision (99 shares or less) in the upcoming tender offer. Currently representing a $125+ return from current prices to the tender offer for anyone looking to play that.

    2
  7. dt

    Thank you Alan for sharing BSIG investment case.

    I believe the core special situation part of the thesis (large tender announcement) has already played out. Any further upside is mostly based on the valuation of Acadian, which might also get sold shortly, as well as the level of corporate overheads going forward. Paulson’s intention to sell part of his stake at $31.5/share is definitely a negative. Current trading clearly shows that shares will drop down after the tender.

    Alan’s $34/share price target turned out only slightly too optimistic, and we are closing this idea with a decent 15% return in 3 months with limited risks.

    Odd lot play still remains for holders of less than 100 shares.

    5
    1. Alan Alan

      Agreed. I am keeping only odd lot position here. Was surprised Paulson is selling down given comps are showing much higher transaction multiples. Might re-enter depending where the shares trade after the tender. I think Acadian is for sale, but timeline is not clear.

      2
      1. snowball

        What are we getting for buying/tendering BSIG and hedging with Dec $30 put?

        If we expect proration of 50% and decide hedge 50% of our long BSIG position with puts, then the $1 dollar/share gain from 50% accepted shares is more than offset by the $1.6/share premium we pay for the other 50%.

        We limit our losses but we are also not making any profit.

        We may gain if BSIG price rises post-tender (because we are effectively holding a synthetic long), but in that scenario proration will likely have been higher than expected, and we are left with fewer BSIG shares to benefit from price appreciation.

    1. snowball

      Was there any precedent in which a large scale tender repurchased >40% of float in one sweep?
      Maybe we can study such precedents.
      My gut feeling is that 70%, and stock price will not decline post-tender.

      1
  8. Jim Davis

    Anyone thinking about doing this in size, as the hedge looks cheap here vs the stock price and 31.5

    Are we assuming a 50% or could it be lower allocation somehow?

    1. snowball

      The hedge being the Dec $30 put? It costs $1.35.
      And our upside to the tender offer of $31.5, from current price of $30.3, is just $1.2.
      Doesn’t look like we are left with any profit potential after the hedge.

      I think the $30 put itself (without matching with a long BSIG position) can be cheap/valuable if we believe that the market is underestimating the odd of price crash post-tender.

  9. snowball

    I am actively considering the following three:

    (1) Long BSIG and participate in the tender (I think proration can be very high in the 60-70% range).
    (2) Dec $30 Call (based on my optimistic view about proration rate, stock price may pop post-tender).
    (3) Dec $30 Put (option market seems to underestimate the odd of price crash post-tender).

    A hedged trade combing (1) and (3) will rely on conflicting assumptions (low participation/high proration but then a price crash post-tender) and will likely cancel out each other in either bullish/bearish scenario.

  10. nuggy5

    What’s going on today with this big drop? I believe people can buy today and still tender at some brokers.

    1. jwestern

      Perhaps so, but my broker’s deadline was 6 pm ET yesterday, for what it’s worth.

      1. nuggy5

        Schwab gave me until tonight. Regardless I was a bit surprised at the drop.

  11. dt

    IB seems to allow to tender till Monday 13:00.

    “The deadline to submit shares to this offer will be 2021-12-06 @ 13:00 (America/New_York).”

  12. Jim Davis

    Was concerned myself, but I dont see a guaranteed delivery on this.

    Thought there was one, but that would explain it

    1. dt

      Was about to write this. No guaranteed delivery. So probably those buying today will not be able to submit shares to tender even if tendering deadline is till 13:00 on Monday.

      1. Jim Davis

        Don’t know why I assumed there was one . Never assume anything. Double check everything 😉

        I bought before today, but for sure some must have bought thus dip thinking it was free money. Now they have to hope for a price reversal .

        1
    1. Jim Davis

      price drop was almost certain, the question of how much is a product of the selloff

  13. Jim Davis

    hate to ask , but any chance of them cancelling the tender. lol

    would be very embarrassing to do that , an I assume Paulson would not be amused

    1. WeagleWeagle123

      10% drop could lead to them cancelling, glad I only limited this to odd lot tender. In other words RRR is currently going below the 46 lower end of the dutch auction.

  14. CharlieSays

    While anything is possible, I think it is unlikely the tender is cancelled, as expiration is Monday and Paulson would keep pressure on the buyback. RRR is a whole other case as there remains a bitter taste from last year’s cancelled tender by MGM.

    1. AK

      There are only a few days left before RRR expiration. How far would the price have to drop in the next few days for RRR to cancel?

      1. AK

        The filing says a 10% drop in the indices (since 11/9). So far the major indices are down ~3.5%. So a lot more pain would have to happen this week for the tender to be canceled but you never know!

    2. Jim Davis

      I forgot about that MGM thing, but in that case wasn’t the price well below the lower bound long before the cancel? A lot more stress at that time as well

      1. CharlieSays

        That is correct, the MGM tender (and the rest of the market) was blindsided by the initial virus panic last year. The severity of that sell off may create an opportunity in RRR if shares can be bought below the lower bound, assuming nothing dramatic happens this coming week that would lead to further sell offs and market stress.

  15. g4734g

    if you are tendering shares which will not be settled by Monday, broker deadline is irrelevant, as DT and others have said “no guaranteed delivery” means shares must be settled by Monday. And yes there is a way to predict the price drop but it all depends on what assumption you use for proration. If you assume 50% (just as a hypothetical) then the price drop should be about the same as the gain on shares bought at the end of the period, as there is not usually much left on the arb bone by the last day. (this of course assumes the arbs have calculated correctly) The higher assumption you use for proration, the greater the expected price drop, again getting close to a breakeven deal if bought at the very end.. That’s how it would work in a perfect world, of course it never does….good luck

    3
  16. Jim Davis

    51% will be bought . not bad

    Large arbs made money , they paid avg 50c to hedge. Made at least a buck or or on the accepted shares.

    Their only risk was cancellation. Free money for them

    1
  17. Jim Davis

    Interesting that those puts were so cheap, there was also a bid for the 30 calls .

    Meanwhile the stock is getting hammered again back to 27

    Odd weakness. Buy op?

  18. g4734g

    seems like they did not make any money if they hedged with 30 puts and got in at 30.50……$1 gain $1 loss

    1. CharlieSays

      Can you help me understand how the options hedge works – would a trader initially hedge (sell call, buy put) the total number of shares submitted into the offer (and adjust the hedge after proration is known), or only hedge the number of shares based on an estimated proration figure?

      1. dt

        There are different ways to hedge tender proration with options, but the most straightforward one is to buy puts for the shares that are expected to be returned back after the tender (i.e. not accepted in the tender). Proration needs to be guessed/estimated in advance. In this case, arbitrageurs are protected from the post-tender share price decline, but have to pay option premium for the privilege. In efficient markets this option premium should be equivalent to the expected drop in the share price post-tender (and usually is).

        2
  19. g4734g

    my view is the weakness pre market, and early trading today, was in response to what I think was a very low proration number, and concern about more shares coming back to arbs and into the market on the sell side, than perhaps anticipated. I’m hopeful that the rebound and stability during the day was a result of folks putting pen to paper on remainco

  20. g4734g

    BSIG under pressure today after running up a lot this week………Wondering if folks are getting their shares back?

Leave a Reply