By Jason Kelly and Sree Vidya Bhaktavatsalam (Bloomberg)
June 20 (Bloomberg) -- Nuveen Investments Inc., the largest U.S. closed-end fund company, agreed to be acquired by Madison Dearborn Partners LLC for $5.75 billion in the biggest leveraged buyout in the asset-management industry.
Madison Dearborn will pay $65 a share in cash for Nuveen, 20 percent more than the stock's closing price yesterday. The Chicago-based money management firm said its board hired Goldman Sachs Group Inc. to solicit higher bids for the next month.
Nuveen, which dates back to 1898, oversees $166 billion for clients, including $53 billion in funds with publicly traded shares. LBO firms bought Commerzbank AG's Jupiter fund unit and London-based Gartmore Investment Management Plc since the start of 2006 because the companies provide steady revenue to cover the debt used to finance the buyouts.
``What really attracts private-equity firms is that asset- management firms throw out so much cash,'' said Ben Phillips, managing director of New York-based investment bank Putnam Lovell NBF Securities. ``Nuveen has very high asset margins.''
TA Associates, a Boston-based buyout firm, agreed in March to acquire London-based Jupiter from Commerzbank for 740 million pounds ($1.48 billion). Last year, San Francisco-based Hellman & Friedman LLC purchased Gartmore.
Public-market investors prize fund managers, too, because they produce more consistent profits than brokerage and securities firms. Before today's buyout agreement, Nuveen shares traded at about 22 times earnings. That compared with less than 11 for New York-based Goldman, though it lagged behind the average of about 30 times for the five-member Standard and Poor's Midcap Asset Management & Custody Banks Index.
Offer Too Low?
James Ellman, whose investment firm Seacliff Capital owns Nuveen shares, said the offer from Madison Dearborn is too low.
``We think that the deal could have easily been worth 40 percent more,'' Ellman said in a telephone interview from his office in San Francisco.
The buyout would create ``an opportunity to accelerate our current strategic initiatives,'' said John Amboian, 46, who will become chief executive officer of Nuveen next month, on a conference call with analysts. Timothy Schwertfeger, 58, who has been CEO since 1996, will remain chairman of Nuveen's fund board.
Unlike typical mutual funds, closed-end funds raise a fixed amount of money in public offerings and are traded throughout the day on stock exchanges.
``Closed-end funds would be one of the pillars for a buyer,'' said Jeffrey Ptak, an analyst at Morningstar Inc. in Chicago. ``They are not subject to the gyrations of the market, and assets aren't going to run away at the first sign of trouble.''
Nuveen reported April 30 that first-quarter net income rose 17 percent and sales gained 23 percent, as institutions doubled their deposits with the company. The company has expanded by offering mutual funds and separately managed accounts for wealthy individuals and institutions. Closed-end funds made up 32 percent of Nuveen's assets, down from 36 percent a year earlier.
Shares of Nuveen rose $9.04 to $63.20 at 12:50 p.m. in composite trading on the New York Stock Exchange. They had gained 4.4 percent so far this year, beating the 3 percent advance in the 61-member Standard and Poor's Midcap Financials Index.
Madison Dearborn's current $6.5 billion fund is the fifth it has raised since the Chicago-based firm was founded in 1992 by ex-First Chicago Corp. executives. Last month, Madison Dearborn offered to buy computer reseller CDW Corp. for about $7.3 billion, the biggest acquisition it has attempted on its own.
The firm, which oversees more than $14 billion in private- equity funds, also participated in the $11.3 billion buyout of Univision Communications Inc. in March.
Madison Dearborn's current financial-services investments include Pax Holding Corp., a securities clearing firm based in Chicago. Previously, it owned PayPal Inc., the online payments network; CapitalSource Inc., a commercial-finance company that now trades on the New York Stock Exchange; and PeopleFirst Inc., an auto lender sold to Capital One Financial Corp. in 2001, according to the firm's Web site.
In the Nuveen deal, Madison Dearborn will assume $550 million of debt, bringing the total transaction value to $6.3 billion.
The special committee of Nuveen's board that considered the buyout was advised by Goldman and Katten Muchin Rosenman LLP. Goldman and Sandler O'Neill & Partners LP provided fairness opinions. Nuveen got legal advice from Cravath, Swaine & Moore LLP and Winston & Strawn LLP.
Madison Dearborn hired Merrill Lynch & Co. and Kirkland & Ellis LLP.