13 October 2006

US Fund Firms, Banks Vie for Sun Life's MFS

Scotia Capital, 13 October 2006


• Yesterday CNBC reported Mellon Financial and Wachovia are both bidding for MFS, which we believe is likely to fetch a price tag in the US$3 billion range, with a deal expected to be announced in the next few weeks.

What It Means

• The reported US$3 billion price tag, or 15x 2006E earnings for MFS is 18% below our estimated value (18x or $7.25 per SLF share) and we suspect significantly below Street expectations.

• An outright sale of MFS at this price, with a significant share buyback using the proceeds (either 60 or 50 million shares depending on a 20% or 35% tax rate on the gain), would be dilutive by $0.01-$0.06 per SLF share, we estimate.

• A vend-in deal would give SLF less than 20% ownership of either acquirer, essentially ruling out equity accounting and forcing SLF to record only dividends and the change in market value as income. We estimate SLF would own 16% of Mellon or just 3% of Wachovia.

• If equity accounting were allowed for the Mellon deal we estimate SLF's share of cost cuts (10% of combined asset management operating expenses, or 30% of MFS operating expenses) to be $0.05 per share.
The Globe and Mail, Andrew Willis, 13 October 2006

As Sun Life Financial Inc. screens suitors for its U.S. money management arm, the insurer is finding that the potential partners with the most to offer aren't the richest bidders.

Sun Life has found both U.S. fund companies and cash-rich banks are vying for MFS Investment Management, a Boston-based money manager worth up to $5-billion (U.S.) that the Toronto-based insurer has been shopping since the summer.

When Sun Life began its strategic review, the company's ideal outcome was swapping 100-per-cent ownership of MFS for a 20- to 49-per-cent stake in a larger, publicly traded money manager, according to sources in the money management industry and at investment banks. At least two fund managers have made it through Sun Life's initial round of screening, according to investment bankers working with bidders. They are Nuveen Investments Inc. and Federated Investors Inc.

If Sun Life could merge Boston-based MFS with either firm, it would come close to fitting that ideal description, as Chicago-based Nuveen has a market capitalization of $4.1-billion and Federated Investors of Pittsburgh sports a $3.6-billion capitalization. Sun Life has told bidders it wants to strike a deal by the end of the year.

Nuveen has won kudos in the past for its ability to integrate acquisitions, and the firm now has six different fund families and $149-billion of assets. Federated is focused on mutual funds and has $210-billion in assets.

But the MFS auction, which is being run by Morgan Stanley, has attracted at least two ambitious U.S. banks with fund management arms. Wachovia Corp. and Mellon Financial Corp. are both interested, according to reports on the CNBC business television network and wire services. If either ended up buying MFS and paid with shares, Sun Life would end up with small holding in a U.S. bank. A cash deal would likely mean a $3-billion gain for Sun Life, but the insurer does not need extra capital.

The prospect of a bank buying MFS put a damper on the insurer's stock price in the past two days and left analysts scratching their heads. "In our view, neither of the two [bank] suitors is ideal from Sun Life's perspective," Mr. Mendonca said. He wrote in a note to clients: "Based on the move in the stock following increased speculation of an MFS transaction, we believe that an outright sale is not what investors had in mind."

Since speculation on negotiations with Wachovia and Mellon emerged on Tuesday, Sun Life shares are down 85 cents (Canadian) or 1.9 per cent on the Toronto Stock Exchange, closing yesterday at $44.74.

"There's a scenario that sees MFS merged with Mellon's money management arm, then the resulting company spun out, and jointly owned by Sun Life and Mellon, but that's a complex deal to do," said one financier involved in the bidding.

Sun Life, Canada's second largest insurer, has owned MFS since 1982. With $168-billion (U.S.) under management, the fund company ranks as the 45th largest U.S. money managers. Any deal would vault it into the top tier. Having a publicly traded U.S. arm would also put a precise value on the unit. In the past, Sun Life executives have expressed frustration with the perceived lack of premium that investors ascribe to MFS.

In addition to the increased marketing heft that comes with size, analysts say a merger of MFS would help the company improve profitability and fund performance, which currently lag peers. For example, MFS could cut costs by outsourcing administration and moving to less expensive office space.

MFS's assets are split almost evenly between mutual funds and institutional accounts. The firm had $6.8-billion in net deposits since the start of 2005, as institutional sales offset redemptions from stock and bond funds.
Financial Post, Duncan Mavin, 13 October 2006

Speculation that Sun Life Financial Inc. will sell Boston-based MFS Investment Management to U.S. banking giant Wachovia Corp. was dismissed as just one of a number of possible outcomes by Sun Life and by insurance industry analysts yesterday.

Sun Life said in September it has engaged advisors to consider "strategic alternatives" to improve performance at MFS, the laggardly asset management subsidiary that has been a drag on performance and the company's stock price of late.

That has lead to a wave of speculation about possible buyers for the company, with Wachovia the latest name to be added to the list. There have also been rumours in the U.S. media that Pittsburgh-based Mellon Financial Corp. is another possible suitor.

A spokesperson for Sun Life would not comment on the speculation.

The spokesperson acknowledged that MFS has already been linked with several possible buyers but he said that no decision has yet been made whether selling the asset manager or any other type of transaction is even the most desirable next step.

In fact, Sun Life is thought to be eyeing a range of options, namely; improve profitability without any deal with an outside party; sell off MFS; or find another asset manager to partner with it. The company's preferred outcome at the moment is thought to be a deal to roll MFS into another asset manager, with Sun Life then taking back a share of the combined entity of between 20% and 49%.

Analysts, meanwhile, said there would be many parties interested in MFS, which may or may not include the companies whose names have been thrown into the ring so far.

"I think Sun Life's conducting a pretty wide search and there are lots of candidates that fit the other side of the equation," said UBS Investment Research analyst Jason Bilodeau.

Genuity Capital Markets analyst Mario Mendonca went a step further.

"In our view, neither of the two potential suitors [Mellon or Wachovia] is ideal from Sun Life's perspective," said Mr. Mendonca in a note.

A deal to sell MFS to Wachovia with Sun Life taking back a minority interest in the larger wealth management company would leave Canada's second-largest insurer with only a small share of about 4% or 5% in the combined company, said Mr. Mendonca.

Although it is "conceivable" that Sun Life could do a similar deal with Mellon -- taking back about 20% of the combined company -- "we are hard pressed to believe that Sun Life would benefit from owning a very small interest in Wachovia," said Mr. Mendonca.

If Wachovia is the winning bidder for MFS, Sun Life would be more likely to receive cash for its interest in the asset manager, he said.

But the insurer already has plenty of capital and raising further cash, possibly in excess of $3-billion, from selling MFS outright "is not what investors had in mind," said Mr. Mendonca.

Sun Life currently owns about 98% of the shares in MFS, which oversees about US$170-billion for clients.