Forbes - T. Rowe Price catches M&A fever

Kevin Dowd

Staff Writer

October 28, 2021

Big Things

T. Rowe Price is taking a rare turn into M&A to build out its network of alternative investment offerings. Getty Images

1. T. Rowe Price bets on debt

T. Rowe Price has emerged in recent years as a frequent investor in late-stage startups. Whether its growth investments in names like Rivian, Uber and Databricks or PIPE investments to support the SPAC mergers of Aurora, Grab, Ginkgo Bioworks and others, the money management giant has put billions of dollars to work buying up slices of relatively nascent companies it thinks could be the next big thing.

On the other hand, T. Rowe Price entirely eschews big-ticket mergers and acquisitions. It has never conducted a takeover worth more than $1 billion, according to PitchBook. Never, that is, until today, when the $1.6 trillion investment behemoth revealed a deal to buy Oak Hill Advisors for as much $4.2 billion, signaling a major expansion into the booming world of private credit investing.

Oak Hill manages $53 billion in assets across a range of credit strategies, but it is best known for investing in distressed debt. Under the ownership of T. Rowe Price, the firm's fund offerings will be broadcast to a much wider universe of investors. And for T. Rowe Price, the takeover means being able to offer more alternative-investment options to its clients, increasing its exposure to an asset class that has grown increasingly popular in recent years as institutions and wealthy individuals pursue higher yields than they're finding in fixed-income markets.

The pursuit of diversification is also driving other financial heavyweights to pursue acquisitions aimed at building out their asset management businesses. Earlier this year, Morgan Stanley closed a $7 billion takeover of Eaton Vance. J.P Morgan Asset Management bought Campbell Global, a forest management firm focused on carbon offsets. State Street bought Brown Brothers Harriman's investor services business, and State Street has reportedly discussed merging its own asset management business with Invesco.

Like so many other sectors, Wall Street has M&A fever.

T. Rowe Price will pay $3.3 billion up front in this takeover—about $2.44 billion in cash and the rest in stock. Another $900 million potential payment will be dependent on Oak Hill's performance over the next four years.

2. Carlyle kills it in Q3

It's never been a better time to be a shareholder of The Carlyle Group.

The private equity colossus announced its financial results for the third quarter of the year today, headlined by distributable earnings of $730.6 million. That equates to $1.54 per share in profits that can be returned to investors—the highest quarterly total in the firm's history.

That's one highlight. There were plenty of other numbers on display that demonstrated just how lucrative 2021 has been for Carlyle, and for the rest of its publicly traded rivals. Carlyle logged net income of $532.8 million between July and September, or $1.46 per share, up 80% over last year. Fee-related earnings climbed 28% year-over-year to $151.4 million. In general, the firm's finances were still a bit depressed during Q3 2020 due to side effects of the pandemic, so that comparison isn't quite apples-to-apples. But even on a longer timeline, this quarter's figures represent notable growth.

Carlyle now claims $293 billion in assets, up 19% since the start of the year. Unlike rivals such as Apollo Global Management and Blackstone, it still maintains a significant portion of that AUM ($175 billion) in its traditional carry funds, rather than in credit, insurance or other assets. Carlyle invested $6.3 billion in capital during the quarter and realized another $14 billion in proceeds.

The total accounting was enough to drive Carlyle's stock price up about 3% on Thursday, continuing an extraordinary year. The firm's shares have gained more than 80% since the start of 2021, taking its market cap north of $20 billion. Blackstone, Apollo, KKR, EQT and other alternative asset managers have all experienced similar spikes this year. Record-breaking rates of deal activity are leading to record-breaking earnings and record-breaking returns to investors, which is the sort of recipe that tends to send a company's stock chart up and to the right.

Carlyle is reportedly aiming to raise $27 billion for its next flagship buyout fund, which would be one of the few largest vehicles in private equity history. It seems to be making solid progress: The firm collected $21.7 billion in new LP commitments during the third quarter, including $13.1 billion for its corporate private equity funds. Overall, Carlyle has raised a staggering $49.6 billion over the past 12 months, a sign of just how eagerly institutional investors are pouring capital into alternative assets.

Carlyle said its private equity portfolio appreciated by 4% during the third quarter. That's substantially less than the 10% appreciation reported by Blackstone during its earnings report last week, but it still easily outstrips the 0.2% gain logged by the S&P 500 over that same period. We'll see how KKR and Apollo compare when those two report their own third-quarter earnings next week.

Shell is trying to fend off calls from an activist investor to break up the company. Getty Images

3. A fragile Shell

It was a busy Wednesday at Royal Dutch Shell, the Dutch energy giant that, like just about every other major oil company, is currently trying to navigate the fraught course between a fossil-fuel-filled past and its visions of a renewable future.

The firm announced that it missed its profit expectations for the third quarter of the year, posting adjusted earnings of $4.1 billion, down from $5.5 billion during Q2. More importantly, perhaps—and certainly more dramatically—activist investor Dan Loeb of Third Point sent a letter revealing to investors that his firm has built up a $750 million stake in Shell and calling for the company to be split in two, with one company focused on oil and gas and the other devoted to clean energy assets.

Loeb argues that Shell is undervalued compared to its rivals. And he argues that this in large part because Shell is attempting to achieve dual aims of maximizing current assets while also transitioning to a greener future, creating confusion and misaligned incentives.

It's a thought-provoking proposition—and one that applies to plenty of other oil companies besides Shell. Here's Loeb going into some more detail on why he thinks investors are shying away from Shell:

"In our view, Shell has too many competing stakeholders pushing it in too many different directions, resulting in an incoherent, conflicting set of strategies attempting to appease multiple interests but satisfying none. Some shareholders want Shell to invest aggressively in renewable energy. Other shareholders want it to prioritize return of capital and enjoy the exposure to legacy oil and gas. Some investors think Shell should shrink to grow, while we suspect some within Shell seem sentimentally attached to its “super major” legacy. Some governments want Shell to decarbonize as rapidly as possible. Other governments want it to continue to invest in oil and gas to keep energy prices affordable for consumers. Europe paradoxically wants both!"

Ben van Beurden, the chief executive of Shell, disagrees with Loeb's call for a breakup, as you might expect. Shell pledged this week to halve its emissions by 2030, and van Beurden says much of the capital to fuel that transition will come from the legacy oil business. In Loeb's opinion, that's not a problem: He writes that a hypothetical standalone legacy energy business "could slow capex beyond what it has already promised, sell assets, and prioritize return of cash to shareholders (which can be reallocated by the market into low-carbon areas of the economy)." It's van Beurden's belief that it would be be better if he and Shell did that reallocating themselves.

The Shell CEO told reporters that he wasn't blindsided by Third Point's announcement and that the company would continue to engage with the firm. Third Point owns less than 0.5% of Shell's stock, but its activist push still packed a punch, driving the company's share price down by some 5% today.

We'll see what unfolds in the weeks to come. And then we'll probably continue to see similar sagas unfold at Shell's rivals around the globe, as oil companies are forced to adapt to a warming world they helped create.

Other Things

• Shares of semiconductor manufacturer GlobalFoundries were down more than 2% this afternoon during their first day of trading on the Nasdaq, continuing a week of chilly receptions for high-profile IPOs. Based in Malta, N.Y., the company priced its debut at $47 per share, at the top of its expected range. GlobalFoundries sold 30.25 million shares itself, generating $1.42 billion in proceeds, and longtime owner Mubadala offloaded another 24.75 million shares, raising $1.16 billion. GlobalFoundries' share price is $45.75 as of this writing, which equates to a $24.5 billion valuation. Before GlobalFoundries locked into its IPO plans, Intel had reportedly tried to buy the company for some $30 billion.

• The public was more receptive to Solo Brands, another company that debuted today. The direct-to-consumer retailer of fire pits, grills, kayaks and other outdoor gear raised $219 million by selling 12.9 million shares on the NYSE for $17 apiece. Its stock opened 31% higher, at $22.36. That figure declined as the afternoon progressed, returning to $19 as of this writing, but that's still good for a 12% pop. And that's good news for Summit Partners, which has backed Solo since last year and retains a 46% post-IPO stake.

• It's been a year full of gambling-influenced takeovers. This is among the biggest yet. Brookfield Business Partners (a publicly traded entity that handles much of Brookfield Asset Management's private equity investing) inked a pact to purchase the global lottery business of Scientific Games for $5.8 billion in cash, plus the potential for a $225 million earnout based on future earnings. Media reports from earlier this month had indicated that Scientific Games was also mulling a potential IPO for the unit, which provides gaming products and services through partnerships with lotteries in more than 50 countries. Headquartered in Las Vegas, Scientific Games makes slot machines, electronic card shufflers and other gambling products. Its stock fell 10% today, dropping its market cap below $8 billion.

• FirstCash, an operator of more than 2,800 pawn shops across the U.S. and Latin America, agreed today to pay $1.17 billion to acquire American First Finance, a provider of lease-to-own retail payments services for what it describes as "credit constrained consumers." The move continues a string of high-profile deals in the world of installment loans—or what we are apparently all now calling the "buy now, pay later" space—as financial services companies aim to offer more online buying flexibility for customers of all kinds. Square, PayPal and Goldman Sachs have all also lined up multibillion-dollar acquisitions in the space over the past several months.

• Antitrust regulators from the European Union have opened a full four-month investigation into Nvidia's agreement to buy chip designer Arm, throwing up a significant obstacle to a $54 billion takeover that, if completed, could reshape the semiconductor industry. Nvidia offered unspecified concessions to help get the deal through, but they weren't enough to alleviate regulatory concerns about potential higher prices and reduced innovation in an industry that continues to grow increasingly critical in both geopolitics and just about every sector of the business world. The commission set itself a March 15 deadline for a final ruling. Here are the European Commission's full initial findings.

• For nearly 75 years, until spinning off as its own company in 1994, Eastman Chemical operated as a subsidiary of Eastman Kodak. Now, it is a much bigger company than its former parent, with more than $8 billion in annual revenue and a market cap of nearly $15 billion. (As for Kodak: Well, it's been a rough decade to be in the camera business.) But Eastman Chemical is about to get a bit smaller: The company announced plans to sell its portfolio of adhesive resin assets to Synthomer for $1 billion in cash, with the price representing an 11x multiple on the division's EBITDA over the past 12 months. Synthomer is a British business that makes polymers for a wide range of end-markets.

• A trio of private equity backers are continuing their work to build Insightsoftware into a powerhouse. The developer of financial reporting software struck a pact today to buy Magnitude Software from 3i Group, with the deal generating $477 million in proceeds for the British investor. Earlier this year, fellow U.K.-based firm Hg invested $1 billion into Insightsoftware to acquire joint control of the company alongside TA Associates. Genstar Capital also owns a minority stake. 3i said it will generate a 2.6x return on the sale of Magnitude, having invested $179 million in the company in 2019.

• In a deal reflecting the global nature of the content wars currently unfolding among Hollywood heavyweights, ViacomCBS agreed to buy a majority stake in Spanish-language content producer Fox TeleColombia & Estudios TeleMexico from Disney and the company's founding family. Founder and chief executive Samuel Duque Rozo and president Samuel Duque Duque (great name) will remain atop the company and run its studio operations in partnership with ViacomCBS Networks International. Fox TeleColombia & Estudios TeleMexico will produce TV shows, films, live sports and other content for the various streaming platforms that reside within the ViacomCBS umbrella, including Paramount+ and Pluto TV.

• It only took Nautic Partners two years to double the size of its flagship buyout fund. The Providence, R.I.-based firm closed its 10th flagship effort today with $3 billion in commitments from LPs, an impressive follow-up to a ninth fund that closed on $1.5 billion in 2019. Nautic is a middle-market investor that operates in the healthcare, industrial and services sectors, with a preference for buying platform companies and building them out through add-ons. In conjunction with the new fund, the firm also announced several new hires and promotions, including the appointment of four new managing directors.

• Nearly five months after announcing plans to go public through a $2.2 billion SPAC deal, flying taxi maker Vertical Aerospace said it has raised $200 million in convertible debt funding from Mudrick Capital Management, which specializes in special situations and distressed assets. The investment is conditional on Vertical Aerospace's SPAC deal closing. That SPAC transaction involves a committed $94 million PIPE investment from blue-chip backers including American Airlines, Honeywell, Rolls-Royce and M12, the venture arm of Microsoft. In unveiling the blank-check merger in June, Vertical Aerospace also announced that it had received "up to" 1,000 pre-orders for its electric vehicles worth as much as $4 billion from American Airlines, Avolon and Virgin Atlantic.

• Software developer Ensemble Health Partners is the latest company to call off an IPO due to "adverse market conditions." The Cincinnati-based developer of tools for managing healthcare revenue updated its plans after the market closed on Wednesday, walking away from a listing on the Nasdaq it hoped would raise as much as $649 million. Golden Gate Capital has owned Ensemble since 2019, when it bought a 51% stake from hospital operator Bon Secours Mercy Health for a reported $1.2 billion.

• Swedish private equity investor Procuritas announced an investment in Strandberg Guitars, a maker of headless guitars. I don't know enough about guitars to properly describe what a headless guitar is, other than to say that it doesn't have a head, which seems a bit reductive, so I'm just going to throw in a link to Strandberg's website and let you look for yourself. The deal was conducted in partnership with founder Ola Strandberg, reflecting Procuritas's preference of investing in founder-led companies. This appears to be Strandberg's first significant outside funding.

Things To Read

These days, Patrick Soon-Shiong is a Los Angeles civic leader, a newspaper tycoon and one of the richest doctors alive. He wouldn't be here without a complicated and controversial history of dealmaking. [The New Yorker]

An examination of how spyware took over schools. [Bloomberg]

The world's tropical rainforests are an irreplaceable resource in the fight against dramatic climate change. And they are rapidly being destroyed. [Reuters]

David Ramsey has built an empire by preaching the perils of debt. He's done it within an industry that couldn't disagree more. [Columbia Journalism Review]

What pandemic? Casinos on the Las Vegas Strip just had their best quarter ever. [Forbes]

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

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Forbes - T. Rowe Price catches M&A fever

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