Marc Rowan of Apollo Global Management
Patrick T. Fallon/Bloomberg
Accretion only matters so much.
Apollo Global Management (ticker: APO) highlighted the earnings benefit from its $11 billion merger with Athene Holding (ATH) as one of big pluses of the deal for the offshore insurer that is 35% owned by Apollo.
The deal would have meant a 68% gain in Apollo’s 2020 earnings if the two companies had been combined. But investors weren’t happy with the combination because it greatly increases Apollo’s exposure to the more capital-intensive, low-multiple insurance business. The deal unveiled Monday is due to close in early 2022.
Apollo shares fell 4.2%, to $47.46, while Athene gained 6%, to $51.80, ending about 5% below the current value of Apollo’s all-stock offer of about 1.15 of its shares for each Athene share.
Investors like the growth prospects and capital-light nature of the alternative-asset business in which Apollo is one of the leaders. Apollo and peers like the Blackstone Group (BX) and KKR (KKR) trade for higher multiples of earnings than most traditional asset managers because of stronger growth outlook as institutional investors gravitate to private equity, real estate, bond and other funds run by alternative managers.
“While a number of positives exist as noted, the earnings mix-shift toward insurance is likely the biggest factor muting the stock reaction,” JMP Securities analyst Devin Ryan wrote after the deal today. “Specifically, the market is currently valuing capital intensive, regulatory complex, and lower growth insurance businesses at substantial discounts to alternative asset management businesses.”
The low valuation of the insurance business is apparent in the deal, with Apollo agreeing to pay just seven times projected 2021 earnings and one times book value for Athene based on the original value of the deal.
Apollo and Athene are cousins, with Apollo having helped create the insurer more than a decade ago and holding a 35% stake in it. Some 40% of Apollo’s assets under management and 30% of its fee-related earnings come from Athene.
Apollo would have earned $3.41 a share in 2020 if it had been merged with Athene against the $2.02 reported for the year. On a pro-forma basis, Athene would have contributed about half of Apollo’s profits last year.
“This transaction is strategic,” Apollo co-founder Marc Rowan said on an investor call earlier Monday. “It is accretive unlike any other transaction I have seen and gives us a lot of benefits at very, very low execution risk, given how much and how well — how much time we’ve spent together and how well we know each other.”
Investors have been concerned about the reliance of Apollo on Athene for such a material portion of its business, but many apparently wanted to see Apollo stick with a controlling ownership stake and not buy out the insurer.
Athene has been growing more rapidly than its peers and is a leader in offering fixed annuities with Apollo making the bond investments that underpin that business. Apollo highlighted Athene’s growth record and opportunity.
“The positives of the deal are clear for APO as it’s substantially accretive at ~7x earnings & more than doubles 2020 earnings, there’s low execution risk, it results in a cleaner one-share, one-vote structure and potential S&P inclusion, and increases the company’s float among other things,” Evercore ISI analyst Glenn Schorr wrote in a client note after the deal news.
Apollo plans to adopt a single class of stock in conjunction with the deal and position itself for potential inclusion in the S&P 500 index which now won’t admit companies with dual-class structures.
“We have a ton of questions related to structure, regulation, and incentives, but think investors will hem and haw about this great and growing alternatives business getting bigger in a lower multiple, lower growth and more capital intensive insurance industry,” Schorr continued.
Apollo plans to pay a $1.60 annual dividend after the deal closes. Athene investors will own about 24% of the company after the deal.
Management will need to win over investors and demonstrate that the enhanced prospects of the combined companies outweigh any impact of the change in business mix. That could take until well into 2022.
Write to Andrew Bary at [email protected]
