Waddell & Reed to be Acquired by Macquarie

We've increased our fair value estimate for no-moat Waddell & Reed WDR to $25 per share to reflect the acquisition price being tendered by Macquarie Asset Management MCQEF for the firm. Without the deal, our fair value estimate would be $16.

Having had time to look at the deal further, we feel we might have been unfair to Macquarie when we said that the premium it was paying for Waddell & Reed was rich. In our original calculations, we had Macquarie laying out $1.6 billion in cash to acquire the firm's common stock, which along with the assumption of $95 million of debt implied an enterprise value/EBITDA multiple of around 11 times our EBITDA estimates for both 2020 and 2021. After selling off the advisory business to LPL Financial for $300 million (with EBITDA declining to around $100 million as a result), the implication was a takeout multiple of around 13 times.

That said, we neglected to take the cash and investments on Waddell & Reed's balance sheet at the end of September into account, including $165 million of cash, $62 million of restricted cash, and $579 million of investment securities. If we include all of this in the takeout price, the deal works out to around 5-6 times EBITDA before and after the LPL transaction--more in line with what a firm as troubled as Waddell & Reed should be fetching, especially as it looks like Macquarie is just going to fold the acquired assets under management into its own funds.

Unfortunately, the restricted cash and perhaps as much as half of the investment securities (which are likely seed capital in Waddell & Reed's funds) need to be excluded from the calculations. This would put the takeout price at around 8 times EBITDA, below the median run-rate EBITDA transaction multiple for asset-manager deals the past decade of around 10 times but still more than we would have expected, given that Affiliated Managers Group tends to pay 8-9 times EBITDA for its stakes in boutique asset managers.

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