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Rating:Could WAMCO Be Legg Mason's Next Big Deal? Not Rated 5.0 Email Routing List Email & Route  Print Print
Tuesday, October 16, 2012

Could WAMCO Be Legg Mason's Next Big Deal?

Reported by Tommy Fernandez

It's been a fairly active two weeks for the mutual fund industry: an affiliate breaking free from Affiliated Manager's Group [profile]; PineBridge Investments [profile] discontinuing its U.S. mutual fund business, and Old Mutual Asset Management [profile] selling off five affiliates.

Then there was the news that three bidders are vying for Harbor Capital Advisors parent Robeco [profile]. The bidders are: AMG; a private equity consortium consisting of Advent International and CVC, and the Japanese firm Orix.

And let's not forget Schwab's [profile] purchase of $2.3 billion asset manager ThomasPartners and Neuberger [profile] taking over the $900 million book of business from Glickenhaus & Co. [profile].

What if these deals were just the beginning of even more activity? Who could be next?

Submitted for your approval, or at least your analysis, the following potential scenario: the potential spinoff of the Western Asset Management bond division from its parent Legg Mason [profile].

Crazy? Maybe crazy like a fox.

Here's what's known:

Former chief executive Mark Fetting announced his retirement from Legg Mason, effective October 1, with the company employing Joseph Sullivan as interim successor. It's no secret that Nelson Peltz, Legg's largest stockholder at roughly 9.5 percent shares outstanding, had been underwhelmed by Fetting's performance.

Legg then hired executive recruiter Korn/Ferry to handle the search for Fetting's permanent successor.

Legg Mason's equity operations have suffered a lot of bad media attention since the 2008 Crisis. For example, Bill Miller's Capital Management Value Equity strategy took a nosedive during 2006-to-2008.

Further activist investor Peltz, who owns the hedge fund Trian Fund Management, doesn't like to wait long for returns on his investments.

Consider this possibility: Western Asset could be exceedingly valuable if it was spun off.

How valuable? Legg Mason in total has roughly $639 billion of assets under management and has a total market cap of $3.26 billion. Only M&A attorneys and deal experts with access to all of Legg's and Western's books could tell you for sure, but consider these guesstimations for the possible values of each piece.

Western Asset, with total assets under management of $446 billion, could be valued at around $3 billion in market cap. We use a conservative figure of valuing a bond fund firm's operations as 0.7 percent of assets under management, which is similar to the pricing The Carlyle Group paid when it bought a controlling interest in TCW.

The rest of Legg Mason, with total assets under management of about $193 billion, could be valued at roughly $2.6 billion. For this figure, we use a conservative 1.5 percent of assets under management for an equity firm. This is similar to the pricing paid by Dai-ichi Life Insurance when it bought a 14 percent interest in Janus.

That would translate into a boon of nearly $6 billion in market cap, nearly double what the businesses were previously worth.

How could this be accomplished? One scenario, but not the only one, would be an IPO for Western and a sale of the rest of Legg to any large equity firm with a relatively clean set of financial sheets.

This is, of course, all conjecture. Indeed a Legg Mason spokesperson, when presented with our theory, had this to declare:
Thanks for your request, but we do not comment on rumors. As you know, we have an interim CEO in place, Joe Sullivan, and the Board has commenced a permanent CEO search process. When we made the announcement, we said that the change did not change Legg Mason’s current corporate structure or our relationship with its affiliates. Legg Mason remains committed to the affiliate model, which combines significant affiliate autonomy in managing its business and the assets of its clients with the financial backing of a strong corporate parent. Our affiliates continue to focus on meeting the needs of their clients during this transition time. We’re more than happy to let you know when we have an update.
One good sign to watch for would be to see the kind of candidate selected by Korn/Ferry and Legg's board as the next chief executive. If the new candidate is an individual with a longstanding solid track record of successfully managing asset firms, then we can guess which direction Legg is going.

However, if a lawyer or M&A specialist is chosen for the job, well, then we can also make a good guess at where the company's going as well. 

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