Bullish on Baer
We think the acquisition of Merrill's international wealth management arm has created a buying opportunity.
On Aug. 13, Julius Baer (BAER) announced it had reached an agreement with Bank of America to buy Merrill Lynch's non-U.S. international wealth management business, or IWM, for 1.2% of assets under management (CHF 864 million, assuming that CHF 72 billion of AUM is transferred). The opportunistic transaction shows our thesis--that a superior capital base would allow Baer to grow as weaker competitors retrench--is playing out. Shares fell nearly 11% in the two days following the announcement on worries that Merrill's business is not sufficiently attractive and news that the transaction will be financed in part by a rights issue.
The recent price drop presents an attractive buying opportunity for the shares of one of Europe's most well-capitalized, best-run banks, in our opinion. The acquisition, like all wealth management acquisitions, presents material execution risks, but we expect significant rewards for long-term investors. While we caution that profitability may be highly variable during the transition period, we anticipate that greater exposure to fast-growing markets will cement Baer's position as a superior asset gatherer. We think that a strong record on acquisitions bodes well for management's ability to turn around IWM's poor profitability, and that Baer's premium image will boost asset inflows. While we see the recent pricing as attractive, we caution investors considering buying now that their stake in Baer will be slightly diluted if they choose not to participate in the upcoming rights offering. The terms of the rights offering are likely to be finalized after the Sept. 19 extraordinary general meeting.
Erin Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.