Insignia Financial may be down to just one suitor, CC Capital, but not everyone is convinced the New York-based private equity firm is ready to pull out of the race just yet.
Research house Morningstar rated the probability of the deal succeeding or failing as equal in the wake of the decision of private equity giant Bain Capital to withdraw from the contest for the 178-year-old financial services company.
Bain cited market volatility for its decision not to proceed with a binding offer at $5 cash per share, matching CC Capital's offer capitalises Insignia at A$3.34 billion (US$2.17 billion).
Morningstar analyst Shaun Ler said CC Capital could proceed with its bid if market volatility eased and Insignia’s fundamentals remained solid, providing upside from the share price of $3.46 on 14 May.
He said if the market fell or the target company’s fund flows deteriorated, the bidder could withdraw or lower its offer, given the absence of competing bidders.
“However we believe it’s too early to include CC Capital will also withdraw, though the risk has increased,” Ler said in a research note.
Market volatility had moderated in recent weeks with constructive talks between the United States and China improving investor sentiment and the VIX index and credit spreads falling toward or below their three-year average.
“If this continues, capital markets could return to more benign conditions,” Ler said.
“While we can’t rule it out, we think it’s less likely Bain exited due to it identifying a fatal flaw in Insignia.
“We see the firm’s fundamentals improving, with better profitability from cost reductions, moderating net outflows and the compounding of client funds.”
Noting Insignia shares were priced with no chance of a takeover proceeding, the analyst lowered his ‘no moat’ fair value estimate to $4.45 from $5 due to the reduced likelihood of a bid under current terms, while the "stand-alone" fair value stood at $3.90.
One broker who does not formally follow Insignia said mergers and acquisitions were an obvious way to achieve scale, which was important in fund management.
“It would have to be more efficient to buy one rather than try and do it from scratch,” he said.
The market uncertainty that prompted Bain to leave the fray was the reason JP Morgan analyst Siddharth Parameswaran downgraded his rating for Insignia to “neutral” in mid-April, saying it posed a risk to the two offers on the table.
“The questions and delays on financing … are interesting and highlights that, even if the parties are keen to progress, the financial market turmoil’s impact on funding does increase the risk of deal completion,” Parameswaran said at the time.
Global asset management giant Brookfield made it a three-way fight when it joined the fray in February but dropped out when the stakes were raised by two rival bidders.
When speculation about the Canadian firm’s potential involvement was swirling in January, Morgan Stanley analyst Andrei Stadnik upgraded his Insignia rating to “equal weight” and raised his share price target from $2.68 to $4.40, citing buyer interest and earnings momentum from rising markets.
“We see longer-term potential for IFL to establish a profitable footprint in a wealth landscape vacated by the banks,” Stadnik said in a note at the time.
In a report in mid-April UBS analyst Shreyas Patel maintained a Hold rating on Insignia with a price target of $4.
At the time of writing Insignia shares were trading up three cents (0.89%) at $3.40, valuing it at $2.28 billion.
