A Leg Up for Legg Mason

The asset manager oversees $670 billion and its valuation makes it a potential buyout target.

If at first you don't succeed, try, try again. Those old words of encouragement come to mind with Tuesday's news that Singapore-based holding company Shanda bought a 9.9 percent stake in Baltimore asset manager Legg Mason.

The purchase of the holding from Nelson Peltz's Trian Fund Management comes less than a year after Shanda pursued another U.S. asset manager, Russell Investments, which instead agreed to be acquired by private equity firms TA Associates and Reverence Capital Partners. But it didn't take long for Shanda to find another way to make its first investment in U.S. financial services, albeit not a controlling position. 

Shanda is enthused about the growth prospects of the asset-management industry, according to chairman and CEO Tianqiao Chen, who has grown the company's investment portfolio to $8 billion from just $60,000 in 1999. So he's probably not too fussed that the minority stake doesn't immediately grant Shanda, whose roots are in China, a board seat. It's also safer than diving in at the deep end considering the bulk of his company's investments have been in China's online gaming industry and the tangential sectors of technology, media and telecommunications.

News of the stake sent Legg Mason's shares as much as 2.6 percent higher and past Shanda's buy-in price of $32 a share. At these levels, it's a bargain according to Wall Street analysts who, on average, expect the stock to rally 30 percent to about $42 in the next 12 months. The company's resumption of a $1 billion buyback program last month should buoy its stock, as should its pending acquisitions of Entrust Capital Management and Clarion Partners, which are both expected to drive margins higher. 

Shanda's Bargain

The Singapore-based holding company snapped up a 9.9% stake at a time when analysts see upside.

Source: Bloomberg

Plus, there's always buyout potential. Legg Mason is valued at 6.9 times its forward Ebitda (on a blended basis), according to data compiled by Bloomberg. Even factoring in a premium, a rival or private equity firms could snap up the company for a discount to the multiple of roughly 9 times that Russell Investments fetched. At least two buyout firms reportedly approached Legg Mason in late 2012 when its stock was flailing, and it's notable that the company's debt level -- once seen as an obstacle to a deal -- has decreased. 

Unless it partners with a private equity firm, Shanda arguably doesn't have the financial firepower to buy the remaining 91.1 percent of Legg Mason that it doesn't own -- at least not right now. But given that it's a "long term strategic investment", you never know. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Gillian Tan in New York at gtan129@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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