AMP To Reinvigorate Private Markets

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AMP has plans to reinvigorate its private markets business, scoping a joint venture deal with Ares Management

-Deal provides some value uplift for AMP
-Should the private markets be hived off completely?
-Hope for some momentum in AMP in FY21
 

By Eva Brocklehurst

With a turnaround in wealth management a sizeable task and completion some way off, AMP Ltd ((AMP)) has decided to reinvigorate its business with the sale of a stake in its private markets division, AMP Capital Investors.

A non-binding agreement with US asset manager Ares Management has been instigated for the sale of 60% of AMPCI, at $2.5bn, excluding seed capital and sponsor investments worth $500m. The deal results in a joint venture for the infrastructure equity & debt, real estate and other private markets investments, with Ares assuming management control and AMP retaining 40%.

In reviewing its valuation in light of the bid, Ord Minnett makes no changes to forecasts and assesses the price of the 60% stake has an implied value for the private markets business of $0.33 per share.

This is more than the value the broker attributes to the whole of AMPCI. The price paid arguably includes a control premium, and there is no guarantee a premium is warranted for the AMP stake, although Ord Minnett acknowledges a deal could influence the value of the remainder.

Citi believes the transaction will provide some value uplift for AMP, albeit with a cost impact on earnings, and calculates it will add around $0.15 to the valuation of the stock. There is no indication in this preliminary announcement of the separation costs or value for the remaining parts of AMPCI.

In terms of stranded costs, the company has indicated the private markets business is relatively lean and stranded costs will be determined by the future of the global equities/fixed income business, in which it is pursuing a potential sale/partnership.

The broker calculates transaction should yield around $1.5bn in net proceeds. It also allows AMP to continue participating in what should be an improved growth performance in the private market business, given the turnaround of wealth remains arduous.

Buyback?

Still, an outcome relies on several assumptions, Citi points out, and the earnings impact also depends on the size of a potential buyback. While AMP may wish to retain some of the proceeds to cover potential liabilities in wealth and further its strategic intentions, it should be possible to distribute a significant portion of the remainder.

Morgans believes the transaction is a positive outcome and, assuming AMP completes a $1bn buyback with the proceeds, considers it mildly dilutive.

Contraditions

Citi has argued before that the private markets business could be better owned elsewhere and a sale/partnership could help the share price. Consequently, the proposed transaction is considered positive, enabling AMP to retain a large stake and at the same time realise value from the proceeds.

While acknowledging it's early days, Ord Minnett is reminded that an indicative bid by Ares for the whole of AMP fell through at a price of $1.85. Moreover, this deal is being pursued by AMP after recently buying back 15% of AMPCI on similar metrics.

The broker suspects there is pressure on the board to crystallise value amid a poor performance in the share price. AMP, in contrast, stated it needed a global partner to increase scale for distribution.

Ord Minnett points out this is also contradictory to what was said at the time of purchasing the Mitsubishi Bank stake six months ago, when AMP said it wanted 100% ownership and have control of its growth strategy.

The main issue is the pricing of the deal and, therefore, Morgans is cautious about the hurdle rates attached to the call option, which allows Ares to potentially buy out AMP after five years.

Further detail is expected on final execution of the transaction and Morgans is hopeful AMP's turnaround will show some momentum in FY21, although acknowledges the challenge is large and will take time.

There is one Buy rating for AMP on the FNArena database (Credit Suisse, yet to update on the transaction) and five Hold. The consensus target is $1.57, suggesting 7.2% upside to the last share price.

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