The announcement about the possible acquisition of Psagot by Altshuler Shaham, following the deal in which the Phoenix acquired Hellman Aldubi, allows investors to gain insights into the value of investment management companies in Israel.
Before we look at the transactions and equities derived for the various investment houses, we will first understand the business model of the companies. Investment houses are a profitable business for everything that relies on the value of assets under management (AUM). The income of the investment houses is a certain percentage of the assets under management. Unlike businesses that have to make sales from scratch on a quarterly basis, a stagnant investment house, in which the assets under management do not change, will continue to record the same quarterly revenue. Therefore, assuming that the cost structure is more or less the same in all investment houses, since its main components are wages and fees, representative profitability can be assumed according to the volume of assets under management.
Experience “in the field” shows that the valuation, which is accepted for investment houses, reflects an economic value for activity of 1% -1.25% of the volume of assets under management. We saw pricing of this value in the proposals for the acquisition of Hellman Aldubi by Altshuler Shaham and Phoenix, a transaction that was eventually carried out by the latter for a payment of NIS 275 million for Helman Aldubi’s provident fund, which manages NIS 22 billion (less the IEC provident funds). Profitability is negligible), giving a price tag of about 1.25%.
A similar value of approximately 1.3% of the volume of assets under management was embodied in the share prices of Altshuler Shaham Gamel, with the start of trading in the share in July 2019 – a market value of approximately NIS 1.24 billion on assets under management of NIS 95.1 billion as of the end of June 2019. Or as the recruiter puts it, it’s a different episode, so the profit line becomes a J-J CURVE curve. This is how it works – in the first stage, the marketing and operating expenses of the investment house will grow, for the purpose of creating future income and the profit line will be hit. After the recruitment phase, there will be a higher income in the future, which will lead to a sharp increase in profit. One of the important data that is missing from the profit and loss statement is the item of deferred purchase expenses. This item embodies commissions and benefits given to insurance agents, in connection with recruiting customers to provident funds is not recorded as an expense, as accounting recognizes this payment The same fees are recorded in the balance sheet on the assets side as an intangible asset. Altshuler Shaham and Gamel are in the rising part of the curve and therefore its pricing is higher than the same kind of benchmark of 1% -1.25%.
Acquisitions and mergers often occur in the investment management industry, the main reason being the operational leverage or size advantage that there is in this industry. An investment team that manages NIS 1 billion can easily manage NIS 5 billion without any change in the structure of labor costs, which is the main cost. Therefore, when Company A acquires Company B, it actually acquires the managed assets of Company B, attaches them to its assets and is left with costs similar to those it had in the first place.
Branch view
In our opinion, from an industry perspective, the investment management industry is very interesting. Years of low interest rates and high commissions in the banking system, attract the Israeli public towards investment houses, which have learned to be efficient and lean, while maintaining a high level of professionalism.
The cheapest investment houses according to the reference we have presented, are analyst and IBI. Although they show stagnation in assets under management in recent years, on the other hand, they are traded in the market (excluding excess assets) at a value that reflects only 0.6% of the volume of assets under management.
Meitav Dash, shows double-digit growth in assets under management and trades at a value that reflects 1% of assets under management.
Atreu Capital Markets is a company that owns 50% of the Yellin Lapidot investment house. This is an investment house whose growth rate of managed assets has moderated in recent years. Atreu’s market value reflects a value ratio of 1.5% on Yellin Lapidot’s managed assets.
Moore Investments, is recruiting at an accelerated pace in its provident activity and is currently in the convex arc of the J curve, which we explained. In Moore’s case, the market is already looking ahead and its stock has risen sharply. For us, it embodies the “Altshuler premium” which we will immediately expand on.
Altshuler Camel
Altshuler Shaham Provident and Pension Company was issued in mid-2019 and has since represented the exception in the investment house industry. It was issued at a reasonable value of 1.15% on the value of its managed assets on the eve of the issue – a value of NIS 1.1 billion with managed assets worth NIS 95 billion. However, Altshuler Provident Fund continued at an accelerated growth rate and increased the assets managed by Provident and Pension from 95 billion in the second quarter of 2019 to 142 billion in the third quarter 2020 an increase of about 50%. In terms of net profit, the company earned an average of NIS 20 million per quarter in the second and third quarters of 2019, this profit increased to an average of NIS 34 million per quarter, in the second and third quarters of 2020. The significant increase in profit, resulting from the size advantage, led to a perceptual change For investors and a leap in the market value of Altshuler Shaham Provident and Pension, which is traded at a value of more than 2% of the volume of assets managed in the company.
What can be learned from the Mizrahi – Union deal
The deal in which Mizrahi Bank acquired Union Bank reminds us very much of what is at stake in the case of Altshuler and Psagot. Mizrahi Bank is the most prominent of all Israeli banks in terms of profitability. It shows a double-digit return on equity every year for the past decade and even earlier (except 2018 due to the provision it made). Its efficiency ratios are the best in the banking system and, accordingly, the bank has traded in recent years at a value in excess of its equity (capital multiplier higher than 1). Union Bank, on the other hand, has suffered all these years from a shortage of smallholders and controlling shareholders (led by Shlomo Eliyahu) whose hand rests on the handle of the refuge chair in light of the fact that the bank had to be sold.
Mizrahi Bank took the opportunity and offered to acquire Union Bank at 60% of its equity and pay in Mizrahi Bank shares that are priced “expensively”. In other words, Mizrahi wanted to add to its balance sheet the full equity of Union Bank and pay only for 60% of it. Not only that, he was able to offer to pay through shares of Mizrahi Bank, whose market value exceeds the value of the bank’s capital. As is well known, money has no smell, therefore, every shekel that resides in the capital of Union Bank and is purchased for about 60 agorot can be registered in the books of Mizrahi Bank at double the value, which was in any case embodied in the prices of Mizrahi Bank shares. With the acquisition of Union Bank, the management of Mizrahi Bank, it created a value close to NIS 1 billion for its shareholders.
If we liken Altshuler Shaham Gamel to Mizrahi Bank, due to the way its shares are traded at a premium, in relation to the competitors’ share prices and we liken Psagot to Union Bank, due to the Apex fund’s obligation to sell Psagot, we can see that here too the buyer comes with a built-in advantage. A deal to purchase Psagot, as it will be executed, at a value reported in the media, about NIS 1-1.5 billion, for managed assets of NIS 165 billion, constitutes a value of only 0.9% of the volume of managed assets. The same NIS 165 billion, which will be purchased at 0.9% on the assets, if they receive the same Altshuler Gamel premium (about 2% of the volume of assets), will generate something out of nothing, an immediate and immediate value of NIS 1.5 billion. Of course, if you want to make it perfect, “Mizrahi Style Bank”, you should pay the consideration in shares.
Bottom line
The investment houses will continue to raise money, and will grow together with the population of Israel. Most players in the industry manage money on all existing platforms, so it is easy to enter a mutual fund or one investment provident fund. We believe that the consolidation trend in the industry will continue to occur, due to the sharpening of the benefits to size. Investment houses such as Hellman Aldubi, which are traded at low value, are expected to be a target for acquisition, mainly by large entities, which are traded at values higher than 1.5% on the volume of assets under management. Purchasing Psagot, for NIS 165 billion in assets, for NIS 1.5 billion, can be a worthwhile deal, depending on who the buyer is and how he intends to pay.
Kobi Segev, managing partner of Accord S.K.L. Investment house
The above should not be construed as a recommendation for the performance of operations and / or investment advice and / or investment marketing and / or advice of any kind. The information presented is for information only and is not a substitute for advice that takes into account the data and the special needs of each person. Anyone who uses the above information – does so at his own discretion and sole responsibility. The company and / or the authors hold and / or may hold some of the papers mentioned above.