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Stock Analyst Update

Waddell & Reed Becomes Latest Asset Manager Acquired

We were not too surprised when the no-moat firm was acquired.

Being big proponents of consolidation among the U.S.-based asset managers, we were not too surprised to see no-moat Waddell & Reed get acquired, but the price tag Macquarie Asset Management has attached to the firm was more than we would have anticipated.

At $25 per share (for 62.548 million outstanding shares of Waddell & Reed on Oct. 23, 2020), the deal prices the firm at $1.7 billion (including $95 million of debt). This is equivalent to 10.5 times our EBITDA projections for both 2020 and 2021. For some perspective, the median run-rate EBITDA transaction multiple for asset manager deals the past decade has been around 10 times, and we really don't consider Waddell & Reed an average player.

During 2015-19, the firm's organic growth rate averaged negative 15.7% annually with a standard deviation of 5.1%. This was far worse than its publicly traded peers and active managers overall. While things improved slightly this year, with organic growth in a negative 9%-11% range, the firm's operating margins remain in the low- to mid-teens (compared with 28%-30% on average for the rest of the group).

Based on how the deal is structured, it looks like Macquarie is grabbing Waddell & Reed's assets under management (of $66.2 billion at the end of October) and folding those into its own operations, while selling off the advisory business (with an estimated $61 billion in assets under administration) to LPL Financial for $300 million (or 6 times estimated run-rate EBITDA of $50 million). This takes the price Macquarie is paying for the asset management business closer to 13 times EBITDA, a richer premium than it probably deserves.

That said, we view this as a good bit of business on management's part for Waddell & Reed shareholders, and much as we've done with other transactions this year, we expect to adjust our fair value estimate for the firm to the takeout price, as we see few impediments to the deal getting done, while continuing to model it as a stand-alone company.

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