The world of investment firms just got a bit smaller and the players in the space have grown a bit larger after news broke that Brookfield Asset Management (BAM) has struck a deal to acquire a majority of Oaktree Capital Group (OAK) at a decent premium to what the company’s shares had been trading at previously. This transaction will turn Brookfield into an even bigger juggernaut than it was, will set the company up to likely end up owning all of Oaktree in the long run, and will seek to create a comprehensive asset manager that has a high degree of exposure to a premier credit platform.

A look at the deal

According to an investor presentation put out by Brookfield, the company has struck a deal to acquire roughly 62% of the outstanding shares in rival Oaktree in a transaction valued at around $4.7 billion. This transaction is set up to pay shareholders of Oaktree either $49 per share in cash or 1.077 shares of Brookfield common in exchange for each share of Oaktree currently outstanding. This $49 price point (the Brookfield component as I type this is now worth $49.99 per share) implies a premium of 11.8% over the price that Oaktree had previously traded for, which explains why units soared 12.3% to close the day out at $49.24.

In its press release covering the transaction, management said that beginning in 2022, the owners constituting the remaining 38% of the business that will be left outstanding will have the right to sell back, over time, their ownership in the business. Depending on the timing of any such sales, it’s possible that Brookfield will own 100% of Oaktree by 2029, giving the firm a rather straightforward path toward acquiring the entire business.

Collectively, the two firms will be a real behemoth, controlling $475 billion in AUM (assets under management) and generating $2.5 billion in annual fee-related revenue. One exciting thing pointed out by management is that there is limited overlap between the firms, so not only does this result in a larger enterprise, it creates one where the company that’s left will be better diversified than either one is today.

*Taken from Brookfield Asset Management

You see, the vast majority of Oaktree today is focused on the credit space. As you can see in the image above, $90.61 billion of its $119.56 billion in AUM comes from credit, with $24.16 billion of that amount coming from its ownership in DoubleLine. Spread across 13 countries, Oaktree is a large firm and an impressive 48% of its AUM as I type this is allocated to closed-end funds. This includes investments in distressed debt, private equity, private and alternative debt, and more. That area of focus is also where the majority of its fee revenue (about 59%) comes from and it’s a market that Brookfield appears interested in tapping into.

*Taken from Brookfield Asset Management

How you might value this transaction

In all, Oaktree is responsible for generating around $0.5 billion per annum in the form of asset manager earnings, while Brookfield generated last year just over $1.3 billion. Together, this will push Brookfield’s up to $1.6 billion because of the 38% it will not own right away, but it’s important to keep in mind that this might not be the best way to judge the value of the transaction. That’s because, for example, the fact that Brookfield generated actual FFO (funds from operations) last year of $4.4 billion, with $1.3 billion accounting for just a slice of that pie. Perhaps the best way to value the firm, since you can’t really split apart Brookfield for valuation purposes, is to look at the picture from the perspective of AUM.

Earlier in this article, I used the $119.56 billion AUM figure reported by Oaktree, and in its presentation, Brookfield even uses that to show their combined AUM. This makes sense from the perspective that Oaktree will be consolidated into Brookfield for accounting purposes, but since Oaktree won’t yet be 100% owned by Brookfield, it might be best to compare Brookfield’s share of AUM in Oaktree to Oaktree itself.

62% of $119.56 billion comes out to $74.13 billion and the management team at Brookfield is paying effectively $4.7 billion for that. Brookfield, meanwhile, has $355 million in AUM and is valued by the market at $46.1 billion. The combined firm, then, should have effective AUM of $429.13 billion, of which Oaktree will account for 17.3%. Based on price paid, however, the company accounts for just 9.3% of the combined firm. That suggests to me, at a simplistic level at least, that Brookfield isn’t doing bad in this deal. Of course, there are several potential explanations to this, ranging from returns on those assets to risks associated with them. Even so, given the complexity of Brookfield especially, it’s difficult to find a way to truly value the transaction.

Takeaway

Right now, it’s an exciting time for shareholders who own Oaktree or at least it should be. The company is receiving a nice premium over where shares were prior to the announcement of the transaction, and on an AUM basis, the firm appears to be offering Brookfield an attractive opportunity. Not only will this move help to create value for Brookfield through these terms, it will also accomplish it through the combined company’s greater scale and wider diversification. In all, I would rate this as a win, in one way or another, for both firms, but especially for Brookfield.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-03-16