BAM - American Equity Investment: Still Worth Holding Given Brookfield Reinsurance's Acquisition

2023-12-07 12:24:42 ET

Summary

• American Equity Investment Life Holding Company is being acquired by Brookfield Reinsurance, and current shareholders will receive a cash payment and shares of Brookfield Asset Management.
• BAM has demonstrated growth and profitability, with diverse revenue streams and a capacity for increased growth while maintaining stability.
• AEL shareholders should focus on the prospects of BAM, which has favorable valuation metrics and is expected to see a solid return in the coming year.

Investment Thesis

American Equity Investment Life Holding Company ( AEL ) warrants a hold rating due to multiple factors impacting its return heading into 2024. While AEL demonstrates solid growth and profitability, the company is in the process of being acquired by Brookfield Reinsurance ( BNRE ). Consequently, current AEL shareholders will receive a cash payment plus a portion of Brookfield Asset Management ( BAM ) shares. While BAM is fairly valued currently, it has multiple factors pointing towards increased growth and return on investment. Therefore, AEL is worth holding until the acquisition is complete within the next year.

Overview: American Equity and Brookfield Asset Management

American Equity provides life insurance and annuity products and was founded in 1995. American Equity appeals to customers by offering fixed and variable annuities that promise a reliable income source that cannot be outlived. AEL indicates multiple metrics that are a buy for me. While American Equity demonstrates solid qualities, it is more important for shareholders looking forward to analyze Brookfield Asset Management, given the acquisition announcement earlier this year. This announcement in July 2023 detailed that Brookfield Reinsurance would buy out outstanding shares of common stock of AEL. Brookfield Reinsurance is a subsidiary of Brookfield Asset Management, a Canadian alternate investment management company that is widely diversified into real estate, renewable energy, infrastructure, and other segments.

Under the terms of the acquisition , current AEL shareholders will receive $38.85 in cash per share of AEL and 0.49707 of a Brookfield Asset Management class A limited voting share with a value equal to the undisturbed 90-day volume-weighted average share price, or VWAP. Currently, BAM’s share price is $35.57 at the time of this article. Assuming this value representing the VWAP is $35.57, investors can expect 0.49707 x $35.57, or $17.68, plus $38.85 in the cash payment for AEL shares. This combined amount would yield $56.53 in value. AEL’s current share price is $55.24 at the time of this article, meaning that buying AEL today would, in theory, eventually result in a favorable transaction once the acquisition is completed.

In a broader sense, investors should look at not just the profitability of the compensation for shares at the time the merger completes, but the growth and profitability of BAM. A sampling of competitors to BAM examined are The Carlyle Group ( CG ), KKR and Co. Inc. ( KKR ), and Onex Corporation ( ONEXF ). BAM has had an average YTD return compared to these peers but has still beaten the S&P 500 index with almost a 25% price return.

Brookfield’s Growth and Profitability

AEL and BAM have both demonstrated growth and profitability. For Q3 ‘23, Brookfield posted a 22.43% YoY EBITDA growth from Q3 ’22 and an impressive 48.63% net profit margin. Furthermore, BAM has multiple factors that make it a superior choice in the Financials sector. BAM’s return on total capital is 12.44%, 94% higher than sector. Its return on total assets is 13.9%, also significantly higher than its sector.

Growth Metrics for BAM Compared to Sector

Source: Seeking Alpha, 4 Dec 23

A key strength of Brookfield Asset Management is its diverse revenue streams. According to its 2022 annual report , BAM earns revenue predominantly through fee-based investment management in multiple segments. These segments include infrastructure, renewable energy, and private equity.

Capacity for Growth While Maintaining Stability

The third factor driving a buy rating is BAM’s capacity for increased growth while providing stable returns. The acquisition of AEL was just one in a string of constant procurements for BAM. Earlier this year, Brookfield Asset Management also bought Network International , a credit card processing company predominantly in the Middle East and Africa, for $2.76B in cash. Additionally, in 2023, BAM acquired a majority stake in CleanMax Enviro Energy Solutions , an Indian solar panel manufacturer. Despite these acquisitions, BAM’s total assets from its last quarterly report was $14.12B, compared to total liabilities of $2.70B. BAM also demonstrates multiple other metrics that indicate its debt management as well as capital efficiency.

Debt and Equity Metrics for BAM Compared to Sector

Source: Seeking Alpha, 5 Dec 23

For income seekers, AEL agreed to suspend its dividend payments when the acquisition was announced. Therefore, AEL shareholders and prospective investors should instead look at the dividend yield for BAM. Last month, BAM declared a $0.32 per share quarterly dividend, resulting in a 3.64% yield. Currently indicating a 70.59% payout ratio, my only concern is with dividend sustainability. Additionally, BAM simply does not have enough of a track record of consecutive dividends for me to consider this a buy for those seeking income in addition to capital appreciation.

Company Outlook and Valuation

Following the merger announcement on July 5, 2023, the compensation for owning AEL shares represented a premium to shareholders, based on both AEL and BAM share price. Any “arbitrage” gain from the acquisition appears to have mostly minimized. With a share price of $55.24 at the time of writing this article, AEL is approximately at its 52-week and all-time high. Given the payout agreement for AEL shareholders, I do not expect AEL share price to see a significant return between now and when the merger is complete in early 2024.

Instead, I will focus on expected growth and profitability for Brookfield Asset Management. Beyond having a strong YTD price return, BAM demonstrates multiple indications of favorable valuation metrics. Despite having a relatively high P/E ratio compared to peers, BAM indicates other metrics to me that point to a solid return going into next year.

BAM has a P/E GAAP FWD of 24.96, higher than sector median of 10.20 and greater than that of peers examined CG (11.20) and KKR (17.75). However, BAM has an attractive EV/EBIT FWD of 5.82. BAM’s P/E GAAP TTM and Price/Sales TTM are significantly lower than peers at 6.97 and 3.39, respectively. Given these valuation metrics, I would argue that BAM is about appropriately priced currently. However, given the company’s diverse revenue streams and capacity for growth, I would expect returns for BAM to be greater than its sector and the market overall in the coming year.

Valuation Metrics for BAM Compared to Financials Industry

Source: Seeking Alpha, 4 Dec 23

Volatility and Risks to Investors

Any risk that American Equity is not acquired by Brookfield seems low at this point. There also seems little risk of AEL share price declining significantly, given the terms of compensation for shareholders. Therefore, any risk lies with the future growth and profitability of Brookfield Asset Management.

Thanks to BAM’s large moat and broad diversification into multiple investment segments, one can reasonably expect stable returns moving forward. The greatest risk I see is regarding BAM’s current dividend yield. With a payout ratio of over 70% and only a short history of paying a dividend, I consider the risk for dividend reduction or elimination something for any income seeker to consider.

Concluding Summary

American Equity Investment itself is a solid company with strong growth and profitability indicators. However, its acquisition by Brookfield Reinsurance is expected to be complete in the first half of 2024. At that point, AEL shareholders will receive a cash payout plus shares in Brookfield Asset Management. Therefore, potential investors must primarily focus on the prospects for BAM, instead of solely AEL.

BAM is a broadly diversified company with indications of continued growth, additional acquisitions, and a dividend payout. While valuation metrics for BAM are mixed, its significant assets, comparatively low debt, and capacity for growth all weigh on the buy side for me. Therefore, AEL warrants a hold to take advantage of the cash payout and expected shares of BAM, which will likely see an increase in value.

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