F&C defends itself against Sherborne activism

F&C Asset Management has defended its performance after Sherborne Investors criticised its recent track record and asked its chairman to step down.

Sherborne says it has reviewed the comparative valuation of F&C and found it to be below that of its peer group on various bases, including the ratio of the sum of its stockmarket value and net indebtedness to revenues. 

It says this ratio, the enterprise value, is particularly relevant to assessing the potential for increase in value for a company with a relatively low stockmarket rating such as F&C.

Sherborne has calculated an enterprise value/revenue ratio of 1.2 times and a price/earnings ratio of 6.1 times for F&C, compared with a peer group ratio of 2.1 times and 12 times respectively.

While stockbrokers’ research have often attributed the relatively low valuation to concerns about the non-renewal of insurance related asset management contracts, Sherborne says its “other investor concerns also contribute to the consistently low valuation placed on F&C’s shares in recent years”. (article continues below)

Given F&C’s relatively low share rating, Sherborne says expansion via acquisition rather than organic growth “risks major dilution to the interests of current shareholders”. 

The combined resulting cost of the acquisition of F&C’s Reit division and Thames River Capital could amount to around £340m, Sherborne estimates. This is greater than the entire stockmarket value of F&C, approximately £270m. Combined assets under management are about 8% of F&C’s total assets under management.

“Even if the acquired businesses turn out to have significantly higher profit margins than F&C’s traditional businesses, it seems to us that they are likely to prove to be highly dilutive to shareholders’ interests, especially if these profits incorporate a large element of volatile performance or other non-recurring fees which carry a lower market rating,” Sherborne says.

F&C, however, says that Sherborne has failed to articulate an alternative strategy and has failed satisfactorily to address the concerns that its board nominees lack the necessary experience.

“A partial and flawed critique of the past is not a strategy for the future,” F&C says. “In particular Sherborne appears to have misunderstood the economics of and rationale for the acquisitions of Reit Asset Management and Thames River Capital, both of which were overwhelmingly supported by shareholders.”