Friday, September 15, 2006

Sun Life Shops MFS

The Globe and Mail, Andrew Willis, Eric Reguly, Sinclair Stewart, 15 September 2006

Sun Life Financial Inc. is holding a $4-billion beauty contest in an attempt to fix its broken U.S. money management arm.

The Canadian insurer is interviewing at least four potential partners for its MFS Investment Management unit, which suffers from high costs, poor performance and a lack of stock market respect.

Toronto-based Sun Life has hired investment bank Morgan Stanley to screen merger candidates for MFS, say sources in the insurance and investing banking industry. All the possible marriage partners are large U.S. fund managers, including Nuveen Investments Inc. and Franklin Resources Inc.

Sun Life chief executive officer Donald Stewart is looking at vending all of MFS for a smaller stake in a much larger firm after weighing the option of selling a portion of the Boston-based company in an initial public offering, and simply keeping control of MFS and trying to fix it.

“Sun Life is getting all sorts of interest in a deal, but whether Stewart is willing to pull the trigger is another question,” said one investment banker working for a possible partner.

A spokesman for Sun Life said MFS's results are improving, and added: “We consider all strategic options across all of Sun Life's businesses internationally, not ruling out anything that builds greater shareholder value for the future.”

MFS is an 80-year-old company; Sun Life bought it in 1982, and analyst estimate that MFS is now worth a minimum of $4-billion (U.S.). With $168-billion of assets under management, MFS ranks as 45th largest U.S. money managers; a deal would vault it into the top tier.

MFS's profitability and fund performance lag its peers, and in the past, Sun Life executives have expressed frustration with the perceived lack of premium that investors ascribe to the U.S. unit. Sources say Mr. Stewart's preferred method of fixing MFS is merging the firm with a rival of similar or larger size, and taking a minority stake, perhaps one-third, of the new entity.

There are precedents for this structure. Sun Life owns 35-per-cent of CI Financial, the income trust that is one of Canada's biggest mutual funds company, and 56-per-cent of McLean Budden, one of Canada's largest institutional money managers. And in the consolidating U.S. industry, Citigroup Inc. merged its funds with Legg Mason Inc. and Merrill Lynch & Co. Inc. tied up with BlackRock Inc. to create industry leaders.

If Sun Life can get to the altar, analysts see the insurer's stock soaring. Robert Wessel at National Bank Financial said in a recent report that the right merger would boost Sun Life's shares 14 per cent. “We believe a combination would be Sun Life's preferred option for MFS, since it offers the greatest potential strategic and financial benefits,” he said.

According to industry and financial sources, the companies that Sun Life sees as possible MFS partners include:

Nuveen Investment, a publicly traded company in Chicago with $149-billion in funds with a number of different brand names and styles.

Franklin Resources, the San Mateo, Calif.-based money manager whose $494-billion of assets include the Templeton fund family.

The money management arm of Morgan Stanley, which has assets of $440-million, mostly in institutional funds.

Putnam Investments, a Boston-based, $181-billion fund manager that is a subsidiary of Marsh & McLennan Cos. Inc.

For all the work being done on the spin out, Sun Life does not need to do a deal, and may opt to stand pat. Genuity Capital Markets analyst Mario Mendonca said in a report last month: “We are inclined to believe that a sale will be considered at a later date after [profit] margins are improved, allowing Sun Life to extract a better valuation.”

There are internal steps MFS can take to boost profitability, including cutting compensation, outsourcing administration and moving to less expensive office space. National Bank Financial's Mr. Wessel estimates that if MFS could simply match its peers on profitability, Sun Life's share price would rise by up to C$2.50. The stock closed Friday at $44.60 on the Toronto Stock Exchange, down 5 cents.