On Friday, AMP Ltd (ASX: AMP) announced its intention to pursue a joint venture partnership with Ares Management Corporation (NYSE: ARES) for one of AMP’s key businesses. What does this all mean for AMP’s share price over the long run?
AMP’s main revenue source is its wealth management arm in Australia and New Zealand, which provides financial advice services. It also offers residential mortgages, deposits and transactional banking.
The key business central to the announcement is AMP Capital, a diversified investment manager across major asset classes including infrastructure debt, infrastructure equity, real estate, equities and fixed interest.
Proposed transaction
Ares is only interested in AMP Capital’s private markets businesses of infrastructure equity and infrastructure debt, real estate, and other minority investments.
Under the proposed transaction, the joint venture is valued at $2.25 billion (excluding retained assets and contingent consideration) with Ares acquiring 60% for $1.35 billion and AMP retaining the residual 40% for $0.90 billion. Ares would assume management control should the transaction proceed.
As part of the transaction, Ares is offering AMP the benefit of retaining $0.6 billion in assets and also a contingent payment of $0.3 billion related to future performance. So, the underlying value of AMP’s existing private markets business is up to $3.15 billion.
Management’s thoughts
AMP Chief Executive, Francesco De Ferrari sounds excited about this potential partnership, as he said, “We expect it would strengthen the business and significantly accelerate our strategy to grow private markets, while de-risking our international expansion plans, and bringing forward the value in AMP Capital for our shareholders. The joint venture would also enable AMP shareholders to participate in anticipated accelerated growth from a business with increased global scale and capability.”
“The transaction will enable AMP to increase focus on the transformation of our wealth management business in Australia, drive the continued growth of AMP Bank and New Zealand wealth management and benefit from driving further efficiency.”
Now what?
Considering AMP’s brand has somewhat diminished in the last few years due to the fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, this proposed transaction appears to be a step in the right direction. AMP Capital’s private markets business will operate under the Ares brand, leveraging their strong brand and global strengths in investment and distribution.
Ares managed to grow its assets under management in excess of 30% over the year, which AMP will hopefully benefit from if the joint venture partnership goes ahead.
Another key benefit of this proposed arrangement is that it will enable AMP to focus on rebuilding its wealth management business in Australia. In AMP’s recent FY20 results, the Australian wealth management arm suffered the biggest decline relative to other businesses, as underlying net profit after tax dropped by 43.6% compared to FY19.
It’s a positive step forward on an extremely challenging road for AMP, as it continues to face a low-interest-rate environment and feel the effects of regulatory changes within the financial advice industry.
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