(1) Bellevue Asset Management (BAM) with currently CHF 4.6 bn AUM (CHF 5.3 bn as of 12/31/2015) incl the management of their most important mandate BB Biotech (65% of AUM);
(2) Bank am Bellevue (BaB) a well-capitalized investment bank suffering from ever decreasing brokerage revenue. BaB is holding a roughly 1% share in SIX AG which is a service provider to the Swiss financial market generating an EBIT of CHF 286 m in 2015.
Bellevue Asset Management acquires German StarCapital
Recently, BAM announced the acquisition of privately held German StarCapital led and founded by Peter Huber. StarCapital manages roughly CHF 2.5 bn (60% retail / 40% institutional) with a focus on fixed income and balanced funds. According to this site, assets under management have increased by more than 200% since 2012.
With the acquisition, BAM aims to diversify its existing product portfolio to reduce the weight of healthcare and equity only strategies. In addition, management plans to make use of StarCapital’s existing distribution infrastructure and BaFin license. According to the company, the acquired products are “ideally complementary”. It is planned that Peter Huber together with two other top executives will stay with StarCapital. Peter Huber will also acquire a stake in Bellevue Group.
Last year, BAM earned more than 100 bps incl performance fees on their AUM. In comparison, StarCapital earns 138 bps on the retail part of their managed assets. Only the retail funds’ management remuneration is publicly available, but one can assume that the institutional part receives a much lower fee. Interestingly, personnel expenses as a percentage of AUM are almost three times higher for BAM than for StarCapital. Based on StarCapital’s information, their fixed income and balanced strategies have been quite successful over the last five years beating their benchmarks over that time period. The opposite is true for the much smaller equity mandates.
The purchase price for StarCapital has not been published yet. I assume that it ranges between 1.5% and 2.0% of AUM or between CHF 37.5 m and CHF 50 m. According to the company, the purchase agreement includes a symmetrical price adjustment mechanism based on StarCapital’s average net profit for the fiscal years from 2016 to 2018. Edit 8/5/2016: acquisition price was CHF 45 m or 1.8% of AUM while the symmetrical price adjustment can be up to +/- CHF 10.8 m depending on the realized profit from 2016 to 2018. Management expects StarCapital’s profit to reach CHF 7.6 m in 2016.
Bellevue Group undertakes a capital increase
To finance this acquisition and to remain financially flexible, Bellevue Group is currently conducting a capital increase. 7 shares grant subscription rights for 2 new registered shares at a price of CHF 11 each (at a 24% discount). Expected gross proceeds from the capital increase are CHF 32.9 m. Bellevue Group’s anchor shareholders representing 34.1% of share capital will not fully participate in the increase.
Valuing the pieces (once again)
After the capital increase, the company will have roughly 13.3 m shares outstanding implying a market cap of CHF 183 m. Provided that the StarCapital acquisition will be completed, BAM’s AUM will ceteris paribus grow to roughly CHF 7.2 bn. I expect BAM to be able to generate CHF 26 m in operating profit per annum. This expectation is based on a blended management fee of 100 bps and BAM’s 2015 operating margin of 36% (this also includes group expenses at Bellevue Group level). So one could argue that the market is currently valuing BAM at a seven times multiple without ascribing any value to the group’s other assets (see below). Another way to value BAM is to take an industry standard percentage of AUM. Assuming again that BAM is worth between 1.5% and 2.0% of AUM, this leads to a range between CHF 108 m and CHF 144 m.
A closer look at the consolidated 2015 balance sheet reveals that BAM is also holding CHF 26.6 m in seed capital which is invested in the company’s investment products alongside their clients. In addition to that, I assume that they were holding roughly CHF 19 m in cash at BAM at yearend 2015.
I have already outlined the operating weaknesses of Bank am Bellevue (BaB) in my original write up. In 2015, another goodwill impairment reduced the bank’s equity to CHF 72 m. However, given the banks financial strength with a Common Equity Tier 1 ratio of 23% and only CHF 10m of goodwill remaining, I believe that the equity is worth at least 70 cents on the dollar leading to an equity value of CHF 50 m. Roughly 50% of this value should be covered by the bank’s share in SIX AG.
A lot of uncertainty is involved
There are many moving pieces involved, but overall I think that the current market cap presents the lower bound of a conservatively estimated equity value for Bellevue Group.
Nevertheless, the cheap price is reflecting a number of uncertainties:
First, with the recent boom in biotech/healthcare possibly abating, BAM’s AUM might come under pressure.
Second, despite the company’s strategy to diversify AUM, BB Biotech remains the group’s most important mandate. A replacement of BB Biotech’s fund manager would literally destroy BAM’s business model.
Third, generally speaking there is a trend to reduce fees for asset managers while expenses for regulatory requirements are increasing at the same time. Bellevue Group charges relatively high management fees for its products. Consequently, BAM’s margins might come under pressure.
Fourth, there is some key man risk involved with the acquisition of StarCapital as Peter Huber is the figurehead and seems to be part of the reason why many clients have chosen StarCapital for their assets.
Apart from that, given the company’s low market valuation the capital increase dilutes existing shareholders. Consequently, there seems to be a management neglect with regard to efficient capital allocation. Management also mentioned that they are looking for a wealth management business to complement BaB’s services. Hence, another acquisition might be announced soon. However, given the bank’s very weak performance over the last years a disposition might be the better option from a shareholder perspective.
This is the uncertainty I am aware of, which I believe is reflected in the current market price.
I will therefore participate in the capital increase adding roughly 60 bps to my existing position.
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