Chicago Private Equity Group Acquires Nuveen Investments

Nuveen Investments Inc. announced yesterday it had agreed to be acquired in a $6.3 billion buyout by a private equity group led by Chicago-based Madison Dearborn Partners LLC. The deal, which includes $5.75 billion in cash and $550 million in debt to be taken on by MDP, values Nuveen’s shares at $65.00, a 20% premium over Nuveen’s closing share price of $54.16 Tuesday and a 26% premium over the 90-day average closing price of $51.26. In trading yesterday, the companies stock opened at $63.52 per share, a jump of roughly 17% from where it closed the day prior, and just under the $65.00 per share that shareholders would get in cash if the deal goes through. Nuveen stock closed at $63.14 yesterday, up 16.6% from the day before. Market participants and analysts said that the buyout will not pose any threats to the municipal mutual fund products that Nuveen maintains. Roughly 80% of the money manager’s open-ended funds invest in municipal bonds, according to Morningstar Inc. Total tax-exempt assets in all types of Nuveen funds, including closed-end funds, total $64 billion, according to Nuveen. “Don’t expect this to change their product line as it is an independent buyer that does not have its own competing product line,” said Richard Ciccarone, managing director at McDonald Investment Management. “It is expected that [MDP] is buying what Nuveen already has in place.” One issue that was targeted during a Nuveen conference call yesterday was whether the company is looking to enlarge their product line. “This transaction is a growth buyout creating an opportunity for us to accelerate our current strategic initiatives,” said Timothy Schwertfeder, Nuveen’s chairman and chief executive officer. “This new ownership structure will help us to retain and attract top talent. We, as a company, are entering a new era of long term growth and development.” Timothy Hurd, managing director for MDP added to this in a statement, saying “we fully support Nuveen Investments’ growth strategies and our objective is to provide additional resources and flexibility to strengthen the company’s long-term strategic development.” What remains unclear is what parts of Nuveen will be the focus in terms of growth. Ciccarone said that while the company has been developing new product lines, they have tended to be in areas besides munis. In fact, the firm has launched only one new muni fund, the California high-yield fund, since 2004, according to Lipper Inc. “They have been growing like wild fire in a lot of areas,” said Rachel Barnard, who analyzes Nuveen stock for Morningstar. Barnard went on to note that their growth in the past few years has been on the equity side, rather than the bond side. John Amboian, who is currently Nuveen’s president but will takeover the CEO position on July 1, focused on structured products and “leveraging” the firms traditional business as plans moving forward. Both Nuveen and MDP did not return calls for comment. This is not the first time a major asset management firm has changed ownership in recent years as large banks and now private equity investors see a high profit margins and on the banking side, see a benefit to adding a money managing arm to their lines of services. In just the last two years, the market has seen Citigroup Investment Banking essentially buy Legg Mason Wood Walker Inc., as well as Merrill Lynch & Co. buy BlackRock Inc. “These are great business in terms of cash generation, they are fantastically profitable,” Barnard said. “Most of them have no debt whatsoever so you can lever them up if you need to and that happens a lot as well with these buyouts.” Jeff Tjornehoj, an analyst at Lipper agreed saying that “asset managers have by and large have had better returns than their counterparts in terms of publicly traded companies.” The Lipper management company index, which measure the stock price performance of 14 of the largest publicly traded companies tells the story. Over the past ten years, this index has averaged a total annual return of 19.82%, where as the Standard & Poor’s 500 daily reinvested index has offered 7.78%. Over the last 3 years, the Lipper index showed a return of 34.25% and the S&P 500 index returned 13.03%. With this type of performance, there has been some speculation that this trend will continue. Federated Investments Inc. stock traded up 3.56% at the opening bell and eventually closed at $40.16, or up 2.80% from the day before, which has many participants seeing this as possibly the next publicly traded fund manager to go down his road. “Federated is well undervalued and there is likely some interested directed towards the company,” Barnard said. “It is trading up today as a result of this speculation.” The Nuveen deal would close by the end of the year although it said it plans to solicit better offers as permitted under terms of the deal through July 19. Schwertfeder called this move the standard architecture of this type of transaction, saying they thought it was in the best interest of shareholders to see if there is anyone in the market willing to pay more. There are several private equity groups who could afford a $6 billion deal, and if it is well over the $65 a share bid, the company intends to seriously consider it, he said. As for the future Nuveen, it may be the case that MDP doesn’t hold on to the company for too long.“The benefits would not be something you would expect them to hold on to for too long,” Ciccarone said. “This may not be the last buyer. There may be a period of time they hold them, they will package them the way they like, and then, at some point down the road, you could see a different owner.”