Brookfield Asset Management Inc. (BAM, Financial) on Friday said it will spin off its asset management business to shareholders at a ratio of one share of the seperated business for every four Class A shares. The Toronto-based investment company will be renamed Brookfield Corp. and trade under the ticker symbol "BN" immediately after the separation.
The stock will begin trading on both the New York and Toronto stock exchanges on Dec. 12
The private equity company's CEO, Bruce Flatt, has been unhappy with the market's pricing of the stock even though it has outperformed the S&P 500 over the past decade. However, the company has underperformed top-tier peers such as Blackstone Inc. (BX, Financial). Brookfield is now trying to remedy the situation by spinning off 25% of its asset management business as a separate company to shareholders, while still retaining a 75% stake in the latter.
Brookfield is a leading global alternative asset manager with over $750 billion in assets under management across real estate, infrastructure, renewable power, private equity and credit. The stock (class A shares) is listed both on the Toronto Stock Exchange and New York Stock Exchange. Class B shares are not publicly traded and are owned entirely by insiders. They also give those owners the right to vote for the other half of directors. From this control position, the partners can guide the direction of Brookfield without having to hold a majority economic interest.
Flatt explained the logic of the spinoff in his quarterly letter to shareholders. He wrote:
"The combination of our top-tier alternative asset management organization with our very significant invested capital makes us unique among our peers and has represented a significant competitive advantage to us in building our business. This combination leverages our significant operating expertise across all our businesses, it further aligns our interests with the investors in our funds, and it means we can move rapidly to seize new opportunities. The bottom line is that today’s Brookfield consists of two businesses that are very different in nature but work together very well. Looking forward, we believe that each of these businesses has incredible potential to expand further. To achieve this growth, however, we have concluded that they should now be separated, while preserving the benefits of their complementary nature and alignment."
The separation will result in the division of Brookfield into two publicly traded companies. The first is the the parent company, which will be renamed Brookfield Corp. The other portion of the business will become Brookfield Asset Management. The transaction will allow shareholders to access a leading pure-play global alternative asset management business. Brookfield Corp. will continue focusing on deploying capital across its operating businesses, growing its cash flows and compounding that capital over the long term.
Flatt expects creating a pure-play asset manager will expand Brookfield's investor base and make the company easier to understand. Currently, he believes some potential investors interested in its asset management business may be put off by the need to also understand and value its proprietary investments (or they may avoid making this effort by taking its proprietary assets into account at a severe discount).
According the company's press release, following the completion of the spinoff, Brookfield Corp. will own 75% of the asset management business, while Brookfield Asset Management will own 25%.
Guru positions
Looking at quarterly trading activity, most Premium gurus have been selling rather than buying the stock. Growth-oriented investors Chuck Akre (Trades, Portfolio) (around 13.3 million shares) and Ron Baron (Trades, Portfolio) (approximately 2.7 million shares) have substantial stakes in Brookfield.
Akre and Baron are both attracted to compounders. Brookfield has certainly delivered great returns in that regard. As shown in the chart below, over the last two decades, the company has left both the Warren Buffett (Trades, Portfolio)'s Berkshsire Hathaway (BRK.A, Financial)(BRK.B, Financial) and the S&P 500 in the dust. If you had invested $10,000 in Brookfield in 2002, the investment would be worth $250,000 today - a 25 bagger.
Mohnish Pabrai (Trades, Portfolio) also enteed a position in Brookfield during the third quarter with a little over 180,000 shares. Pabrai is known to be an opportunistic investor and the timing of his investment is interesting, so he may see an opportunity.
Conclusion
Since asset managers do not need much in the way of facilities, equipment or working capital to do business, Brookfield plans for the manager to pay out approximately 90% of its annual earnings in dividends. But Brookfield's "appetite for investment capital” means it will cut its annual dividend; the combined dividends of the two entities will be about the same as the company's current payout.
The newly spun off company will appeal to dividend-oriented investors who are looking for lower volatility, while the parent company will be more suited for investors seeking compounders that do not mind volatility. Brookfield is expecting the new company to trade at a higher price-earnings ratio as compared to the parent company before the spinoff.
Based on historical ratios, past financial performance and analysts' future earnings projections, the GF Value Line suggests the stock is significantly undervalued currently. The stock has shot up recently in anticipation of the spinoff.
I think at this time it is safer for investors to wait for the spin-off to settle and the excitement to abate before buying. That way, short-term traders and speculators would be mostly gone and long-term investors can take their position in either the parent or the spun off entitity depending on their investment objectives.
We will also get a better read for the manager's balance sheet and get to see how much debt Brookfield will put on it. Seth Klarman (Trades, Portfolio) has said spinoffs are an interesting place to look because there is a natural constituency of sellers and not a natural constituency of buyers. This makes sense as spinoffs disturb the status quo and can shake out the lazy and ignorant investors who have a tendency to sell first and ask questions later.
Expect a lot of volatility in Brookfield shares as institutional investors rebalance their positions to accommodate their investment objectives.
