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Oaktree Capital (OAK) is being acquired by Brookfield Asset Management (BAM) as part of a privatization transaction. Some Oaktree insider holders retain control of Oaktree Capital by 38%. Brookfield seeks to acquire the other 62%. I'm not happy about that because Oaktree Capital is one of the names I thought I'd owned for a long time. It has also served as a creative type of protection because it has under-mobilized assets because its troubled operations have nothing to do with the central banks that handle all types of zombie operations. I wrote it in the special situation report of May 2017 and October 2018 and also publicly in February 2019. This article aims to determine whether it is appropriate to sell your shares or keep them for the purpose of # 39; s acquisition.
Here are what I consider to be the main issues to consider:
Marks and Karsh retain control
Howard Marks, Bruce Karsh and other Oaktree Capital Group Holdings, LP members will own 38% and retain operational control of Oaktree.
This is why it is essentially a go-private. Insiders forego certain units, but Brookfield primarily buys external unitholders for a low premium of approximately 12.4% to approximately 16%. This is extremely far from the average takeaway premiums. This also reflects the nature of privatization, as these tend to occur at much lower premiums. There is also a last $ 1.05 distribution, however.
Extract of the press release:
Oaktree Class A Unitholders may elect to receive for each Class A Unit of Oaktree either $ 49.00 in cash or 1.0770 Class A Shares of Brookfield to enable them to retain investment in the Company. all activities.
BAM trades at $ 45.92, which means you get a minimal premium if you take the stock. The premium is so low that the added risk is selling your shares for cash currently on the market at $ 49.
It might be worth taking the shares for tax reasons. Although businesses are distinct and each has their own idiosyncrasies, they share some positive attributes. I give the buyer asset management company and its managing director, Bruce Flatt, an extremely high rating, and you will not have to sell because you are afraid of being swallowed by a bad institution.
Data by YCharts
Brookfield and Oaktree will continue to operate their respective businesses independently, partnering to leverage their strengths – each remaining under its current brand and led by existing management and investment teams. Howard Marks will remain Co-Chair of Oaktree, Bruce Karsh as Co-Chair and Chief Investment Officer and Jay Wintrob as Chief Executive Officer. Howard Marks and Bruce Karsh will continue to exercise operational control over Oaktree as an independent entity in the near future. In addition, Howard Marks will join Brookfield's Board of Directors.
The largest alternative company
BAM and OAK will together have assets under management of approximately $ 475 billion. This means that only Blackstone (BX) can compete with him. Jonathan Gray of Blackstone and Bruce Flatt both described size as a competitive advantage. Something I question, but it can be a relative advantage over medium-sized companies.
Comment from the CEO
Here's what Flatt said:
As we continue to strategically develop Brookfield, we are excited to partner with Oaktree and its exceptional management team, whose credit operations are second to none. This transaction allows us to expand our product offering by including one of the best credit platforms in the world, with a different, contrarian, and consistent investment style.
Oaktree is very focused on credit, making it a very attractive acquisition for a replacement product company that is not so important in this area. BAM will have to rely on a 62% stake, which makes it slightly less attractive for cross-selling Oaktree funds.
The brands said:
The opportunity to join Brookfield is ideal. Our businesses share a culture that emphasizes both investment excellence and integrity, and our activities combine seamlessly and without conflict. The rest of Oaktree's management and I are excited about the combination of support and independence we expect. We hope Brookfield will contribute to our ability to serve our customers and do the same for them.
I consider the two companies as examples of the investment sector and I totally buy here the cultural / philosophical mesh. Usually all of this has to be taken with a grain of salt, but Oaktree would not really have the same scale with most other great physical education stores in the United States. That's one of the reasons I do not think we should expect someone to present a higher bid.
Distribution
Oaktree can pay a final distribution of $ 1.05 per unit. This distribution brings the return to around 2%. Interestingly, it's the March distribution. An extra 2% return while waiting a few more days is well worth it. But where will the market be traded after? I think the market will leave a gap of at least 1%. But waiting for this distribution could be comparable to an annualized return of 12% to 20%.
Additional distributions may be paid if the transaction has not been closed by September 30, 2019. It is almost 7 months from now. It is scheduled to close in the third quarter before that date.
Doing business
Oaktree unitholders must approve, but 92% of Oaktree's voting rights were engaged in the transaction. I do not think there are many regulatory constraints. They are an American firm and a Canadian firm. They belong to sectors where competition is widespread and do not have a significant market share either. These are financial institutions, but asset managers are not systematically important.
summary
The annualized return will be in the range of 3% to 6% for the duration of the transaction. I imagine that it will end at the bottom of the range. Most of this return comes from a distribution that may have tax implications. This is not a very attractive return. However, a good part of the return will come very quickly. This portion could have a very high annualized return depending on the type of distribution that the market will subsequently allocate.
Sometimes, you can at least hope that a third party is overpriced and pays a heavier premium. Above all, it is a very low premium. However, I do not think it can ever happen here. Oaktree insiders are ready to continue under the wing of Brookfield as they constitute an exceptional cultural wedding. They would never sell to a higher bid from a company that does not match the same degree. I think the odds of a higher bid are extremely low. Below 5%. At the same time, I think there is virtually no risk (certainly less than 5%) that the transaction is not concluded.
If you like a very secure 4% return, this could be an option for you. I rarely see cases that I consider to be such a lock. If the agreement was to be concluded anyway, the inconvenience is not terrible because the premium is so low. It may be worth keeping until distribution, because in the worst case, the market will sell the stock with the amount of the distribution. I imagine that this could be particularly interesting if you pay little tax on distributions (but note that OAK is a partnership with tax idiosyncrasies).
See the investment report in a special situation if you want uncorrelated statements. We look at special situations such as spin-offs, share buybacks, rights offerings and M & A like Oaktree Capital. Ideas like this are particularly interesting in the last stages of the economic cycle.
Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
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