No. of Recommendations: 11
In renewing its normal course issuer bid to buy back Class A shares, Brookfield reported average buyback prices for the expiring one-year NCIB. That report quantified the damage to the parent's share price resulting from the BAM spinout:
The weighted average price that Brookfield paid per Class A Share acquired under this bid was US$42.22 for the period beginning on May 25, 2022 and ending on December 9, 2022 (being the last trading day before the date on which Brookfield completed the public listing and distribution of a 25% interest in its asset management business) and US$31.64 for the period beginning on December 12, 2022 and ending on May 17, 2023.
In short, the average BN share price declined by exactly 25% ' the same percentage as the slice of the asset management business that was spun out. It suggests the market sees asset management as the entirety of the parent's business and attributes no value to any of its other invested capital.
By contrast, the 25% BAM spinout represented 7.5% of the parent's net invested capital by Brookfield's generous calculation. Using my own valuation, which subtracts all credit for uncollected carried interest and discounts the real estate portfolio to 80% of its dramatically reduced book value, the spinout represented 14.5% of the parent's invested capital. Both suggest the reduction in the parent's share price post-spinout is overdone.
The current BN share price makes sense relative to the pre-spinout share price only if one assigns zero value to everything else in the portfolio, including shares in BEP, BIP, BBU, BPG, other direct investments in hard assets, and the nascent insurance business. It's possible to produce widely different estimates of value for these holdings, but I don't know of any method that produces a value of zero.
Nor is the market internally consistent, although that's not exactly news. If asset management were the entire business, BN would be worth three times the 25% stake held by the public, or roughly $39 billion at current prices. But BN has a current market cap about $12 billion more than that. So other assets count toward total value but not toward the calculation by which 25% of the asset management franchise is subtracted. Seems like a remedial math problem.
Oddly, in the wake of this disconnect the company's language around prospective buybacks has grown less aggressive. In the Q4 2022 letter to shareholders, dated Feb. 9, it said:
"With a net asset value per share which we estimate to be vastly higher than our share price, we expect to continue to use our cash resources to
repurchase shares in the market. If the discount persists, we will also consider other options, including a tender offer."
In the Q1 2023 letter, dated May 11, it boiled it down to this:
"Given the current share price and our view of the intrinsic value of our business, we expect to continue to repurchase shares."
