07 October 2006

Sun Life's MFS Sale Could Enrich Management

Financial Post, Duncan Mavin, 7 October 2006

Executives at MFS Investment Management could find themselves a lot richer if the asset manager is sold off by Canadian parent Sun Life Financial Inc., which has admitted to searching for "strategic alternatives" for its Boston-based subsidiary.

Sun Life currently owns 98% of MFS's shares, leaving about 2% for MFS's management.

However, management is entitled to hold up to 22% of the company "through some form of ownership," said a spokesman for Sun Life yesterday.

Analysts estimate MFS would be valued at between $4.5-billion and $5.4-billion if Sun Life can find a buyer -- management's share would therefore grow from an estimate of about $100-million to about $1-billion, as a result of the share transfer.

Toronto-based Sun Life has not disclosed exactly what would trigger the distribution of additional shares to MFS's management.

"Sun Life Financial has a compensation structure at MFS to create a meaningful ownership stake for MFS management," the company said in regulatory filings last year.

A spokesman for the company would not give further details of the obligation.

But speculation in the U.S. media this week suggests Sun Life would be contractually obliged to distribute the shares if it agrees to sell the asset management company, an outcome Sun Life is believed to be considering.

MFS has been the main drag on performance at Sun Life, where results have otherwise been very strong in recent quarters.

Several industry analysts have said that getting rid of MFS would give a boost to Sun Life's share price -- whose stock trades at a discount to its Canadian peers --and improve performance.

In September, the life insurance giant revealed it has engaged investment bankers to consider options for MFS, which are thought to include a possible sale of the company.

Meanwhile, some industry observers said yesterday that Sun Life's obligation to give shares to MFS's management is "nothing new" and that it has been factored in to valuations of MFS.

However, that this issue has surfaced now may be an indication that MFS's management is flexing its muscles prior to Sun Life completing any deal in order to ensure they receive due consideration in a transaction.

"This is a business where the assets are the people and it would be naive to think you could do a deal without significant buy-in from those individuals even without the [share distribution obligations,]" said UBS Investment Research analyst Jason Bilodeau.

"People are one of the biggest challenges in getting a deal done like this," Mr. Bilodeau said. "Making sure you have a deal that the employees and executive management are supportive of is important," he said.