St. Paul Travelers Cos., Minnesota's largest insurer and the 13th largest in the U.S., wants to divest its majority stake in Nuveen Investments. But unlike other major financial companies like Citigroup and American Express that are now hoping to shed the non-core businesses they added during the corporate acquisition feast of the 1990s, St. Paul Travelers will begrudgingly part with what is easily its most lucrative unit.
Nuveen shares were up about 11% on news of the possible sale and were trading at $40.73 at deadline.
The possible Nuveen spinoff, which was revealed during a St. Paul Travelers earnings call earlier this month, could be good news for the Chicago-based asset manager's class A shareholders, who control a 21% stake that's traded on the New York Stock Exchange under the symbol JNC. St. Paul Travelers owns the remaining 79% of the firm.
"This could be a good thing for existing Nuveen shareholders if the deal allowed more of the stock to float," Rachel Barnard, a senior stock analyst at Chicago-based Morningstar, wrote in a research report after the news broke.
"In our view, Nuveen shares have had a liquidity discount in the past because of the low float. Many institutional investors are not interested in the stock because they cannot take a meaningful stake without moving the market," she continued. "If St. Paul offers its Nuveen stake to the market, this would open up the stock to a larger group of potential investors. We would view anything that increases the float as beneficial. We would also hope to see Nuveen revamp its voting rules and ditch its dual share classes to give investors more of a voice in the company's governance."
Barnard said in an interview that she thinks St. Paul Travelers is leaning toward an IPO, which would then nix the dual share classes and provide common shareholders with voting rights. Further fueling IPO speculation is the fact that although four of Nuveen's 11 board members are St. Paul Travelers executives, the company operates largely independent of its parent.
"Certainly, they've got a good management team in place. They've basically been operating on their own," Barnard said.
According to Nuveen Senior Vice President of Finance Peggy Wilson, the two parties are jointly exploring divestiture options, which include the prospect of a private sale. No timetable has been set, she said, but Merrill Lynch and Morgan Stanley have been retained to advise on the transaction.
Jay Fishman, CEO of the $107 billion property and casualty insurer, said that a divestiture of Nuveen, which has posted 10 years of consecutive earnings growth, would provide the capital flexibility and the level of credit ratings St. Paul Travelers has been pursuing in recent years.
"It is truly, in that regard, a potentially transforming event," Fishman said, adding that the capital would be made available downstream to St. Paul Travelers' various insurance companies to encourage organic growth and enable future acquisition opportunities central to its core business.
Nuveen, which has $115 billion in assets under management, certainly has been profitable to its parent's earnings. The shop contributed $32 million in operating income to St. Paul Travelers' $307 million in total operating income in the fourth quarter of 2004. Total revenue to St. Paul Travelers from Nuveen in the period was $137 million.
"Nuveen has been a cash cow for them," Barnard remarked, noting that its margins are upwards of 15% higher than the asset management industry's average of 35%. She forecasts long-term earnings growth of 9%. Over the past five years, the company's earnings have averaged 8.4% growth.
St. Paul Travelers, however, needs cash more quickly than Nuveen can provide on a quarterly and annual basis, according to Morningstar Analyst Matt Nellans. Lackluster underwriting and aggressive attorneys, byproducts of massive asbestos settlements, have badly damaged the insurer's capital base. For instance, the company took a $922 million asbestos settlement-related charge in the fourth quarter. St. Paul Travelers executives hope it's the last such write down it will make, but analysts like Nellans aren't so sure. Either way, as Fishman noted, the sale of Nuveen would provide instantaneous capital flexibility.
"Nuveen is a good business, very well run," said Jim Johnson, an analyst at Keefe, Bruyette and Woods of Hartford, Conn. "In a different environment, Travelers probably wouldn't want to get rid of them. And there is some platform-sharing that exists there."
Nuveen, however, probably won't miss the distribution channels of St. Paul Travelers all that much, Barnard offered, as most of its products are already distributed to brokers and dealers through an established wholesale team.
Nuveen's most recent success has been built on its uncanny ability to continuously distribute new closed-end funds, where it is far and away the industry's No. 1 issuer. As is the nature of a closed-end fund, Nuveen simply collects management fees on all outstanding shares and never has to redeem shares when an investor sells. "They've carved out a nice niche for themselves," Johnson said.
They're also on the leading edge of the booming real estate fund and hedge fund markets, but haven't betrayed their municipal bond roots, which are still very attractive to high-net-worth clients hoping to sock away money in a low-risk, tax-free account. On top of that, the shop has maintained a squeaky-clean reputation throughout the late-trading and market-timing scandal.
That doesn't mean, however, that Nuveen is a particularly attractive acquisition, Johnson warned. According to Keefe, Bruyette and Woods analysis, Nuveen's current valuation is more than 13 times its earnings before interest, taxes, depreciation and amortization.
"Whoever buys it, they're not getting it cheap," he said.
"Nuveen is large, too. It's a $4 billion company. That's a bit big for a lot of our guys," Johnson added, noting that it might draw attention from a large European bank or similar foreign entity.
St. Paul Travelers made its original investment in Nuveen in 1974 and Nuveen's initial public offering in 1992.