Apollo Bids $11 Billion For a Different Headache

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Apollo Global Management Inc. wants to be known as the smartest credit investor out there. But its relationship with Athene Holding Ltd. — the insurance company it created, took public and now wants to absorb in a $29 billion merger — has long appeared too clever by half. Investors disliked the potential conflicts between the asset manager and the annuity provider. A full union appears to be replacing one set of doubts with another.

Shares in Apollo have fallen 3% since the transaction was announced on Monday while its main peers have outperformed a rising market. The value of the all-stock offer to Athene shareholders has slipped to around $55 a share, representing an ungenerous 12% takeover premium. This deal was meant to create a stronger company and a more liquid share that could get into the S&P 500. The market is skeptical.

Apollo is in fact trying to get out of a pickle of its own making. When it set up Athene in 2009, it was exploiting the crisis-driven withdrawal of capital from the financial sector. In 2016, it sold the business in an initial public offering. But Apollo remained a shareholder, one with a lucrative contract to manage the assets backing Athene’s policies. Its interests weren’t aligned with other Athene investors, and yet it held considerable sway.

There were some changes to the arrangements between the firms after reporting by the Financial Times on the fees Apollo garnered. But investors’ still had their doubts. Athene’s shares were up only 22% from their IPO price before this week’s announcement, despite book value per share rising 80%. Apollo meanwhile faced the risk that Athene’s other investors would eventually push for a clean break.

So mashing the two together would seem to make sense. Apollo goes from managing Athene’s assets to fully controlling them, vastly expanding its balance sheet and giving it a store of permanent capital. That’s useful when seeding new funds. The move apes the insurance-cum-asset management model associated with legendary investor Warren Buffett. Apollo will be able to consolidate all of Athene’s earnings versus none at all with the minority stake. Plus the buyout firm is offering a measly top-up on Athene’s low starting valuation of 0.9 times adjusted book value.

The reasoning gets trickier from there. There are no quantifiable synergies like cost cuts. Above all, the deal makes Apollo a different animal that will be more challenging to value. The firm’s financial profile will be transformed given that around one-third of its market capitalization will be attributed to an annuities business. Stock market investors have had a difficult relationship with insurance in general and Athene in particular. The sector fell over 40% when pandemic panic gripped markets in February and March 2020. Athene fell nearly 70%.

Investors associate insurance with black-box economics. Small changes in assumptions for mortality or interest rates can inflate liabilities. There are worries about credit exposure, too, when the economy runs into trouble. Apollo co-founder Marc Rowan, now chief executive officer designate to replace Leon Black, was this week at pains to prove Athene is not that kind of insurer. Rather, it’s a simple “spread” business: Essentially it pays income to policy holders that is more than covered by the yield on its investments. Shareholders pocket the excess. This, the argument goes, fits with Apollo’s expertise in finding assets that generate decent risk-adjusted yield.

It’s true that Athene’s products are relatively simple compared to what you may find in other insurers. The snag is that they’re still more complicated than asset management. Athene is also sizable. As of Friday, its market value was almost half as big as Apollo’s. Buyout giant KKR & Co. recently took a controlling stake in insurer Global Atlantic Financial Group, but the relative proportions left no doubt it was still the old KKR.

Apollo was trading at around 18 times forward earnings prior to the announcement, Athene on 6. Crudely, the merged weighted multiple would be around 14. M&G Plc, a U.K. asset manager with an insurance arm, is on 10 times. One measure of success will be if Apollo’s valuation multiple stays closer to where it was originally. But Rowan has to prove there’s more to this deal than buying a captive partner at a cheap price.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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