Shareholders approved a dramatic new look for Brookfield Asset Management Inc. this week, agreeing the global financial giant should divide itself into two publicly traded companies.
Should investors consider pouncing on Brookfield before the division occurs within the next month or so?
The current structure of the company consists of one part that has direct ownership in businesses related to renewable power, infrastructure, private equity, real estate and insurance. Here, growth comes from capital appreciation.
The other part is an asset management business that invests for others, mostly sophisticated investors who want to tap into Brookfield’s expertise in so-called alternative assets that may have little to do with the stock market. Here, Brookfield’s earnings are derived from its fees on the business’s investments.
The combination of these two parts has worked well for Brookfield over the years. Its share price has outperformed the S&P 500 Index over the past decade by about 35 percentage points, and that doesn’t include dividends.
But in a proposal floated earlier this year, and now nearing completion, Brookfield will spin out the asset manager into a separate company, while maintaining a 75-per-cent ownership stake in it.
The move may narrow a discount that has been weighing heavily on Brookfield’s share price because of the company’s complexity. The separated asset management business will line up nicely with big U.S. peers such as Blackstone Inc., KKR & Co. Inc. and Apollo Global Management Inc., making valuation and growth comparisons much simpler.
As well, the separated company could attract a new type of investor who is focused on cash distributions. Brookfield estimates the asset manager will distribute about 90 per cent of its annual earnings in dividends.
This week, Bruce Flatt, Brookfield’s chief executive officer, added some colour to this figure: Initially, the spinoff should generate about US$2-billion of distributable earnings, and he expects to double that amount over the next five years as the new company expands.
There is no official estimate of the yield on the new shares yet, and Brookfield’s five-year earnings estimates could be a tad too optimistic.
A number of analysts, who weighed in after Brookfield reported its third-quarter results this week, also remain upbeat.
They estimate the share price of the parent company is still not reflecting the sum of its parts, or net asset value, simply because investors aren’t recognizing the full value of the asset management business.
Mark Rothschild, an analyst at Canaccord Genuity, estimates Brookfield’s net asset value is US$59.76 per share, implying the stock trades at an unusually large 25-per-cent discount, based on Thursday’s share price.
The bullish case rests on the spinoff shrinking the discount, or eliminating it, sending Brookfield’s share price higher.
“We continue to believe there is significantly more upside (about US$20 per share) than downside (about US$10 per share) at the current valuation and believe ‘the spin’ in December could surface some of the former, but not much of the latter,” Mario Saric, an analyst at Bank of Nova Scotia, said in a note.
Interested investors face a choice: Buy now or wait?
Buying Brookfield shares today means investors will end up with shares in the parent company and the asset manager after the spinoff is completed. If everything unfolds as planned, they’ll lock into the discount before it disappears – but will also be taking a flyer on a stock that does not yet exist.
Waiting until the asset management company begins trading will give investors a better appreciation of what the new stock offers, and the opportunity to focus on a single stock, rather than both the parent and the spinoff.
Waiting would be the safer bet. But buying Brookfield today may offer the bigger reward.
David Berman