Wednesday, September 20, 2006

Potential MFS Deal has Risks for Sun Life

Reuters, Lynne Olver, 20 September 2006

Sun Life Financial Inc.'s Boston-based MFS Investment Management unit could be worth $4 billion to $5 billion, analysts estimate, but some also see risks in merging or selling the U.S. money manager.

Toronto-based insurer Sun Life said earlier this week that it had hired advisers and was mulling alternatives for MFS, where profit margins are rising but remain sub-par for the industry.

Sun Life cautioned that a deal involving MFS was not a certainty.

Boston-based mutual fund company Putnam Investments may also be sold by its owner, insurance broker Marsh & McLennan Cos. Marsh said late on Tuesday that it had just started a review of Putnam.

Having another fund manager on the auction block may not help MFS, Genuity Capital analyst Mario Mendonca said on Wednesday.

"If you put your house up for sale on your street and your neighbor does too, that's unfortunate," Mendonca told Reuters.

But MFS's overall business appears to be on the upswing, despite net redemptions in its retail mutual funds, while Putnam continues to see large net redemptions, Mendonca said. He estimated the value of MFS at about C$5.4 billion ($4.8 billion).

MFS's sales are lackluster but margins are improving from low levels, Merrill Lynch analyst Andre-Philippe Hardy said in a research note on Tuesday.

"Selling now would give away potential improvements to a buyer," Hardy wrote. But a sale could give the stock a sizable boost, he concluded.

RBC Capital Markets analyst Jamie Keating estimated MFS could fetch roughly $5 billion, or 3 percent of the money manager's $168 billion in assets under management.

In a research note on Tuesday, Keating said there was "considerable" risk in getting the right deal done.

He pointed out that Sun Life's U.S. business model is aimed at high-net-worth individuals through its universal life, annuities and mutual fund products. There should be distribution efficiencies for the MFS and annuity businesses together, Keating said, so by giving up control of MFS -- by selling it outright or "vending" it into a larger entity -- Sun Life could limit or jeopardize its U.S. business associations.

Some of the companies that are speculated to be possible partners for MFS have seen heavy mutual fund redemptions, so their involvement could be problematic, Keating also said.

Net redemptions have plagued MFS's U.S. retail mutual fund business in the last three years, but that has been offset with inflows into institutional and managed fund products, National Bank Financial analyst Rob Wessel said in an August report.

Wessel estimated MFS is worth $4 billion to $5 billion in various scenarios.

Press reports have cited a laundry list of potential partners or bidders, mostly large, publicly traded U.S. money managers. Observers say vending MFS into a private company or maintaining the status quo are possibilities too.

Sun Life shares rose for a third straight day on Wednesday. They closed at C$46.19, up 36 Canadian cents or 0.8 percent, after hitting an intraday high of C$46.46, the highest level since mid-June.

Despite recent gains, Sun Life stock has underperformed its bigger Canadian insurance rival Manulife Financial so far this year with a 1.9 percent decline, versus a 6.3 percent gain for Manulife.