Invesco Ltd. has struck up the largest deal by an asset manager in nine years as it looks to expand its stake in the stock-picking business.
In a $5.7 billion deal, Invesco has officially announced its bid to acquire active asset manager OppenheimerFunds Inc. from Massachusetts Mutual Life Insurance Co., which will become Invesco's largest shareholder with a 15.5% stake once the deal closes. By adding OppenheimerFunds, Invesco's assets under management will climb to $1.23 trillion, making it the 13th-largest investment manager in the world.
Asset managers as a whole have faced challenging operating conditions for the better part of a decade. But the rising popularity of passive investment vehicles, such as exchange-traded funds and index funds, has put stock pickers and active asset managers under pressure in particular, as their products and services tend to carry steeper price tags and have largely failed to match the broader market's performance.
Yet, Invesco's management team remains optimistic about the outlook for OppenheimerFunds, an active asset manager, once the company comes under its corporate umbrella.
"What we're doing is building an organization that is going to push through these more extreme market environments," Invesco President and CEO Martin Flanagan said Oct. 18 during an earnings and deal call with analysts. "[Active management is] just not going to go away."
Invesco has made passive management a core part of its business in recent years. The company, now the fourth-largest ETF provider in the world, made a series of acquisitions in 2017 that bolstered its presence in the ETF market, including a $1.20 billion deal for Guggenheim Investment's ETF business. Invesco's passively managed assets, which represent 25.9% of its total AUM, grew 5.3% from June 30 to Sept. 30. By comparison, the company's actively managed assets, which still take up a lion's share of its overall assets, grew by 0.7% over the three-month period.
The company has been far from immune to the industry-wide pressures. In the third quarter, Invesco saw long-term net outflows of $11.2 billion, after seeing net inflows of $4.1 billion a year earlier. That was "significantly weaker" than RBC Capital Markets analyst Ken Lee's estimate for $5.0 billion in outflows, the analyst wrote in an Oct. 18 research report.
The deal for OppenheimerFunds marks a slight detour from Invesco's growing presence in passive management, though.
Approximately 75% of OppenheimerFunds' assets are rooted in active and distinct strategies geared toward global stocks, fixed income and alternatives. OppenheimerFunds is also expected to add to Invesco's distribution capabilities. While there has been mounting pressure around U.S. equity-focused active strategies' performances, other asset classes such as international and emerging market equities, which OppenheimerFunds specializes in, have seen stronger returns, Morgan Stanley analyst Mike Cyprys wrote in an Oct. 18 research report.
Invesco's deal is structured such that MassMutual and OppenheimerFunds employee shareholders will receive a consideration of 81.9 million shares of Invesco's common shares and $4 billion in perpetual, noncumulative preferred shares with a 21-year non-call period and a fixed rate of 5.9%.
The sizable amount of debt incorporated into the deal caught the attention of rating agencies soon after the bid was announced.
On Oct. 17, S&P Global Ratings downgraded Invesco's issuer credit rating from A to BBB+ with a stable outlook as the rating agency expects Invesco's leverage to increase in light of the acquisition. S&P Global Ratings previously projected that Invesco's leverage would decrease by year end. Meanwhile, Fitch Ratings affirmed the asset manager's ratings, saying it believes the transaction can help Invesco's expansion by way of increased scale and a better position in the U.S. retail mutual fund market.
Invesco's chief executive said he believes that the deal will not seem as expensive over time. "I don't view it as debt. It has got a lot of equity-like characteristics in terms of it [being] noncumulative," Flanagan said.
The play for OppenheimerFunds is also projected to be lucrative for Invesco. The company expects its pro forma EPS to see accretion of about 18% in the first nine months of 2019. In 2020, Invesco expects to see 27% of accretion to its EPS. The company projects that it will see $475 million in cost savings as well.
Invesco's operating margin will exceed 45% by 2020 as a result of the acquisition, compared with an operating margin of 24% in the third quarter, said CFO Loren Starr, who called the financial returns of the OppenheimerFunds deal "extraordinarily compelling" during the call.
S&P Global Ratings and S&P Global Market Intelligence are both owned by S&P Global Inc.