Brookfield says it will spin off stake in asset management business

Brookfield Asset Management Inc. (BAM-A-T) says it will spin off a new asset-management business to shareholders by the year’s end, creating a roughly US$80-billion entity that will pay most of the dividends its shareholders now receive.

Thursday’s announcement confirms the trial balloon Brookfield floated three months ago, when it said it was considering the move. The company invests for itself, which requires it to raise billions of dollars in capital, but also manages money for others. Money managers who need little capital tend to get higher valuations from investors, a benefit Brookfield wasn’t receiving with the two businesses yoked together as one.

“The bottom line is that today’s Brookfield consists of two businesses that are very different in nature but work together very well,” chief executive officer Bruce Flatt said in his quarterly letter to shareholders released Thursday morning. “Looking forward, we believe that each of these businesses has incredible potential to expand further. To achieve this growth, however, we have concluded that they should now be separated, while preserving the benefits of their complementary nature and alignment.”

Investor reaction was cool, however, as Brookfield shares fell on a day the broader markets .

Brookfield says it will distribute a 25-per-cent interest in the asset manager to its shareholders, keeping the remaining 75 per cent for itself. It expects the value of the spinoff to be about US$12 per share.

“Since asset managers don’t need much in the way of facilities, equipment or working capital to do business, we plan for the manager to pay out approximately 90 per cent of its annual earnings in dividends,” Mr. Flatt wrote.

He said Brookfield’s “appetite for investment capital” means it will cut its annual dividend, with an eye to the combined dividends of the two entities being about the same as Brookfield’s current payout.

Brookfield declared a quarterly dividend Thursday of 14 US cents. At an annualized rate of 56 US cents, it represents a 1.2-per-cent yield on Wednesday’s NYSE closing price of US$46.83.

Brookfield said that post-spinoff it expects to hold about US$135-billion of investments – the roughly US$75-billion it currently owns plus about US$60-billion of shares in the asset manager. The public will hold about US$20-billion of shares in the new entity.

The asset manager will list on the New York and Toronto stock exchanges. Brookfield expects the spinoff to be tax-free to shareholders. It also said it will ensure that holders of Brookfield Reinsurance shares – exchangeable for Class A shares of Brookfield – will be treated equally from an economic perspective.

“Separated from ‘asset-heavy’ investments, we think the performance of the manager as an investment manager will become even more visible, and therefore be more appealing to investors desirous of a pure-play investment in the alternatives industry,” Mr. Flatt wrote. “On the other hand, shareholders who wish to retain exposure to the capital investment function may favor the corporation. Of course, any shareholder who likes things exactly the way they’ve been will be able to hold both shares side-by-side and have just that.”

The separate asset-management company would add to a dizzying array of Brookfield entities available to investors. Three limited partnerships – Brookfield Infrastructure Partners LP, Brookfield Renewable Partners LP and Brookfield Business Partners LP – trade on the New York and Toronto exchanges. Brookfield Infrastructure Corp., a subsidiary of the limited partnership, trades on the NYSE. Brookfield Asset Management Reinsurance Partners Ltd. trades on both exchanges. And the Brookfield Global Infrastructure Securities Income Fund trades in Toronto.

The spinoff announcement came as Brookfield reported first-quarter net income of US$2.96-billion, down from US$3.77-billion in the same period last year. Higher interest costs, depreciation and tax expense, coupled with smaller realized investment gains, drove the decline.

The company’s cash-like measure of “distributable earnings” fell to US$1.18-billion from $2.51-billion in the first quarter of 2021, largely due to a steep drop in disposition gains.

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