Stilwell's skillful reorganization of its Janus and Berger brands last month cast the spotlight on Janus and its new CEO Mark Whiston [see MFMN 9/9/02].

Few, though, took note of Kansas City, Mo.-based Stilwell's plans for its 33% stake in DST Systems, an information-processing firm with a $4 billion market cap, also based in Kansas City, that largely serves the mutual fund industry. Senior management has been looking at strategic alternatives for that $1.3 billion investment for a few months now, according to a Stilwell spokeswoman.

Stilwell is ditching the holding-company structure it formed when Janus, Berger, DST and Nelson Money Managers of London were spun off of Kansas City Southern Industries Inc. in July 2000. The company will complete the reorganization on Dec. 31, assuming the name Janus Capital Management Inc.

Back on the Open Market

Analysts said Stilwell would most likely sell all or part of the stake back to DST, and offer the rest on the open market. They discounted, however, the likelihood of a sale to a single outside buyer, one that would result in a takeover of the entire company.

DST stock traded down on the day of the reorg news, from $34.08 per share to $32.13. At press time, the stock was trading down a marked 27%, at $24.90, below the pre-reorg high.

Janus "would want to sell the company when mutual fund conditions are better," said Peter Heckmann, an analyst at Stifel Nicolaus of New York, since DST has been undervalued as the industry has struggled.

Stilwell declined comment on a time frame for any DST transaction, or whether it was using a bank. Analysts speculated any DST deal wouldn't happen before the end of the year, anyway.

If DST goes the share-repurchase route, it could secure the funding by monetizing a few of its own large investments, 4% of $13.5 billion market-cap State Street Corp. and 5% of $6.2 billion market-cap Computer Sciences Corp., analysts said. Those investments would probably be worth roughly $660 million in a sale after tax, according to an estimate by Carla Cooper, an analyst at Robert W. Baird of New York.

DST declined comment. It has been an active repurchaser of shares. On March 1, DST announced an extension of its current 2.9 million share-repurchase program through April 2003 and began a second one for another six million shares.

New York-based Merrill Lynch Analyst Stephen McClellan said the most likely route for funding a share repurchase would be a sale of DST's television billing business, which would generate proceeds of about $185 million at a multiple of one times sales.

Whole Thing Up for Grabs?

But, one analyst, Cooper, said: "This [announcement by Stilwell] says [they] are actively looking for a buyer" for the stake, which could translate into a sale of the whole company. It wouldn't make much sense for a third party to buy 33% of DST and not pick up the rest to gain a controlling interest, she added.

Still, Cooper had difficulty identifying potential buyers who would have the cash that Stilwell wants out of a deal to pay off its debt. Stilwell has said publicly it wants to eliminate its $900 million debt load. Two possible buyers that came to Cooper's mind were $13.5 billion market-cap State Street and $6.7 billion market-cap FiServ Inc. of Brookfield, Wis

Boston-based State Street has been a long-time partner of DST. In fact, the two have a joint venture: mutual fund transfer agency Boston Financial Data. FiServ has publicized its desire to expand beyond commercial banking information-processing.

However, for FiServ, DST would likely be "too big of a nut for them to bite off," Cooper said.

"Nobody's paid much attention to the fact that there appears to be a pending [DST] transaction here," Heckmann said. DST will probably step in to buy some of the Stilwell stake, he said, likely between $200 million and $600 million worth.

He and Cooper noted that DST could buy back shares even at well over $40 per share and maintain liquidity.

Analysts also mentioned that yet another possibility for Janus is to simply spin off the DST shares to its own shareholders.

Mark Cecil is associate editor for Mergers & Acquisitions Report.

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