CA - Buy Brookfield Asset Management At A 14% Discount Via The American Equity Buyout

2023-09-20 10:29:00 ET

Summary

• American Equity Investment Life has agreed to sell itself to BNRE. AEL shareholders will receive a mix of cash and BAM stock.
• AEL shares are currently trading below the offer price, creating an arbitrage opportunity for investors interested in a long position in BAM.
• BAM has released a new five-year plan with a target to generate $5 billion in distributable earnings by 2028, potentially leading to a 9% pro forma dividend yield.

Introduction

In July, American Equity Investment Life ( AEL ) entered into an agreement to be acquired by Brookfield Reinsurance ( BNRE ) ( BNRE:CA ) in a cash and stock deal. Brookfield outbid Prosperity Group which initially offered $45 per share of AEL but cannot (or did not want to) compete with Brookfield’s pro forma bid of $55 per share. I’m calling it a "pro forma bid" because there still are some moving parts and the final consideration depends on the share price of Brookfield Asset Management ( BAM ) ( BAM:CA ).

Meanwhile, there is an interesting arbitrage opportunity here as the current share price of AEL is trading below the offer and it could be an interesting possibility for an investor interested in a long position in Brookfield Asset Management.

The details of the proposed acquisition

In this article I won’t discuss whether or not this is a good deal for American Equity, as it pretty much is a "done deal." Brookfield’s offer was substantially higher than Prosperity Group, and now, three months later, no other bidders have emerged. So I'm operating under the assumption the deal goes ahead and will close in the first half of the year. You may also want to read Trapping Value’s article on the deal.

The proposed acquisition price of $55/share upon the announcement is divided in a cash portion and a stock proportion. Each AEL shareholder will receive $38.85 in cash and 0.49707 shared of Brookfield Asset Management per share of AEL. The preferred shares will not be called and will remain outstanding.

On Monday, the closing price of AEL was $54.06 while the share price of BAM was $35.86. In theory, this means the offer is valued at $38.85 + (0.49707 * $35.86) = $56.67 and this would indicate AEL is trading at a 5% discount.

Interestingly, Brookfield’s bid contains a minimum and a cap .

If based on the 10-day VWAP of the BAM Shares (measured five business days prior to closing of the transaction) (the “BAM Final Stock Price”), the BAM Shares are trading at a price such that the aggregate consideration per AEL share would be less than $54.00 per share, the number of BAM Shares delivered for each AEL Share will be increased such that the value of the aggregate consideration delivered for each AEL Share will equal $54.00 and Brookfield Reinsurance will have the option to pay cash in lieu of some or all of the share portion of the Merger Consideration. In the event that the BAM Final Stock Price would result in the aggregate Merger Consideration per AEL Share being greater than $56.50, the number of BAM Shares delivered for each AEL Share will be decreased such that the value of the aggregate consideration delivered for each AEL Share will equal $56.50.

So based on the closing price as of Monday, this cap would come into effect as Brookfield’s share price is "too high." This means the ratio of Brookfield shares would be reduced to $56.5 - $38.85 => $17.65 / $35.86 = 0.4922 shares of BAM.

Of course this is per definition a moving target but keep in mind Brookfield will not pay less than $54 but will also not pay more than $56.5 for AEL.

Using the updated share ratio, we can now also revert the calculation to calculate the implied acquisition cost for BAM.

You can buy AEL for $54.06. You know you are for sure getting $38.85 in cash which means the implied value of BAM stock is $54.06 - $38.85 = $15.21. Knowing that in this scenario we will be getting 0.4922 shares of Bam, the implied value paid per received share of BAM is $15.21 / 0.4922 = $30.90. No new shares will be issued, Brookfield Corporation ( BN ) will be issuing the BAM shares.

This indeed implies you could purchase BAM shares at a double digit discount to the current share price.

Why would you want to own Brookfield Asset Management

Of course the main question now also is why you would want to own Brookfield Asset Management. Admittedly, I have been lukewarm on the stock in the past as although the company is a very robust performer, it has always been trading at pretty high valuations.

However, the company’s recent capital markets presentation with the new five-year plan was released last week. BAM now has a very firm target to generate about $5B in distributable earnings by 2028 which would imply a 150% increase from the LTM distributable earnings .

This would imply a distributable earnings result of $3.05 assuming the share count doesn’t change. More importantly, the asset manager confirmed it intends to distribute at least 90% of the distributable income in dividends. This means that by 2028, the annual distribution should exceed $2.70/share. And based on the implied purchase price of $30.90 through the arbitrage using AEL shares, the pro forma dividend yield would be around 9% by 2028 assuming Brookfield Asset Management meets its own targets. I have no reason to expect Brookfield to miss their targets as they have massively exceeded the targets in the previous five-year plan.

Investment thesis

Based on the respective AEL and BAM closing prices on Monday, you would be able to pick up BAM stock at just $30.90 per share, which is a discount of 13.8% compared to BAM’s closing price.

I currently have no position in BAM but after digging into the five-year guidance I'm getting very interested. Rather than buying the stock on the open market, I may just buy AEL and tender the shares into the cash and stock bid which would basically allow me to initiate a long position in BAM at a 14% discount to the current share price.

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