AMP shareholders want more detail on Ares deal

Investors gave a tentative cheer when the wealth manager announced a spin-off its private markets business, but there are still some big questions to be answered.

AMP shareholders heaved a sigh of relief on Friday when the embattled financial services group finally struck a deal with the Los Angeles-based Ares Management Corporation that seems to offer a brighter future for its prized asset – the private markets business that sits within AMP Capital.

AMP has been on the back foot ever since its board, chaired by Debra Hazelton, announced that the troubled company would conduct a strategic review of its portfolio last September – a move that effectively slapped a “for sale” sign on the troubled company’s various businesses.

Two months later, Ares emerged as a potential suitor, lobbing a conditional takeover proposal that valued the company about $6 billion.

However, if the AMP board hoped that its portfolio review would set the stage for a highly competitive auction process, it was sorely disappointed.

No other bidder expressed any interest in acquiring the AMP business in its entirety, although there was no shortage of opportunistic buyers keen to acquire select assets at good prices.

Needless to say, Ares’ negotiating position was hugely strengthened when it became painfully obvious to everyone that the giant US asset manager was the only bidder that had bothered to turn up at the auction.

Meanwhile, AMP shareholders were becoming increasingly alarmed that the sales process was extremely damaging for the company and its valuable asset management business, AMP Capital.

As part of its due diligence, Ares was able to go around both the AMP board and AMP’s chief executive, Francesco De Ferrari, and talk directly to the senior executives in AMP Capital’s private market business.

And these discussions revealed that key staff in AMP Capital were very receptive to the prospect of working for Ares.


Pressure piles up

This added to the pressure on the AMP board to resolve the situation, before too many executives – particularly the highly-coveted deal-doers – decided to walk out the door.

That’s why AMP clung to the hope of salvaging a deal even when Ares walked away from its $6 billion takeover offer this month.

So it’s little wonder that long-suffering AMP shareholders were cheered on Friday when the embattled company said it had finally reached a non-binding deal for a “joint venture partnership” with Ares to split up AMP Capital to form a new business.

Ares will pay $1.35 billion for 60 per cent ownership of the new business – which will house AMP Capital’s prized infrastructure and real estate assets – and will also take the management reins.

What’s more, the new business will bear the “Ares” brand, rather than the tarnished “AMP” moniker.

For its part, AMP will retain a 40 per cent stake in the new business, valued at $900 million.

In addition, AMP will retain ownership of a further $500 million of investments it has made in its various infrastructure and real estate funds; $100 million of surplus capital, and up to $300 million that it might earn from performance fees and carried interest in these funds.

AMP will also keep full ownership of AMP Capital’s public markets business – which includes listed global and Australian equities and fixed interest operations – that it intends to sell separately.

AMP shareholders noted that these were lower margin businesses that generated much less revenue than the private markets operations.

Overall, AMP shareholders appeared inclined to support the latest deal with Ares.

They found it gratifying that the deal put an implied value of up to $3.15 billion on AMP’s private markets business, which is slightly higher than the $3.1 billion valuation that was put on the entire AMP Capital business last August, when AMP bought back Mitsubishi UFJ Trust and Banking Corporation’s 15 per cent stake in the business.

And they also pointed out that it appeared that Ares had structured the deal so as to keep the headline price tag at the modest level of $1.35 billion.

“Ares is listed, so I think there is a bit of optics involved here”, said one AMP shareholder.

“Ares shareholders might have complained if it appeared that it was paying $3.15 billion for AMP Capital’s private market business.”

Upside from the growth

What’s more, AMP shareholders were hopeful that the deal with Ares would enable AMP’s private market business to grow rapidly, which would make it much more valuable.

“There’s a lot of upside for AMP from the growth”, noted one. “This deal makes sense if you believe that AMP’s stake will be worth a lot more over time.”

Still, some AMP shareholders noted ruefully that this had to be one of the most lopsided joint venture deals in history, given that Ares was emerging not only with a majority stake, but would control six of the 10 board seats, and had also been granted a clear pathway to full ownership of the business.

Indeed, major AMP shareholders are already signalling that they will want a lot more information about the detail of the put and call options that cover the sale of AMP’s residual stake in the business, and which start kicking in after five years.

In particular, they will be keen to find out the exact terms of the call options that Ares has to acquire AMP’s stake, and what formula will determine the price Ares has to pay.

(AMP also has put options, under which it can force Ares to buy its stake in the jointly owned business.)

The other big question concerns Ares’ ability to lock in key AMP Capital executives.

Employment contracts

Major AMP shareholders said it was likely that Ares would use its 30-day exclusivity period to negotiate employment contracts with key AMP Capital executives, and would be able to offer them Ares’ shares as an inducement for them to commit to remaining with the private market business.

It’s clear that Ares’ ability to retain and incentivise key executives will be crucial for the future success of the private market business.

And that, of course, raises the question of what decision Ares will come to regarding Boe Pahari.

There was an investor revolt at AMP last year after the board promoted Pahari to the plum job of running AMP Capital, even though the financial group had settled a sexual harassment complaint against him that had been brought by a female subordinate.

Pahari was demoted and returned to his prior role as head of infrastructure equity at AMP Capital.

It’s possible Ares might decide that Pahari is no longer as important to the private market business, especially now that US and European investors are putting a lot more emphasis on environmental, social and corporate governance issues.

Finally, AMP shareholders noted that the spin-off of AMP’s private market assets would only underscore the group’s bloated cost structure.

“There will be a lot more pressure to reduce those costs when there’s only the bank and the wealth management business,” one shareholder noted.

This article AMP shareholders want more detail on Ares deal was originally published in AFR.