OppenheimerFunds Acquisition Prompts Invesco Review

We are placing narrow-moat-rated  Invesco (IVZ) under review while we assess the impact of the OppenheimerFunds acquisition. Not only did the rumors about a deal pan out, but the price tag of $5.7 billion was even higher than the early estimates. The purchase is also being paid for entirely with stock--89.1 million shares of Invesco common stock (worth $1.7 billion) and $4 billion worth of preferred stock with a 5.9% coupon--as opposed to cash or debt. Given where the shares are trading right now (less than 8 times this year's consensus earnings estimate), this is a much more dilutive means of acquiring the assets, in our view.

Invesco closed out the third quarter with $980.9 billion in managed assets, up 6.9% year over year and 2.0% sequentially. Net long-term outflows of $11.2 billion were slightly worse than our forecast for $10.8 billion in net redemptions, but adverse currency exchange decreased total assets under management by $13.8 billion (worse than our forecast). Equity outflows of $7.5 billion during the quarter were in line with what we've seen from some of the other asset managers as investors continue to derisk portfolios as a result of increased uncertainty about global monetary policy and trade.

With average long-term AUM up 10.6% year over year and the firm's realization rate (on a GAAP basis) declining to 0.422% (from 0.477% in the prior-year period), the company reported a 2.2% decline in third-quarter management fee revenue and only a 0.3% increase in total revenue, aided largely by an uptick in other revenue. Even so, year-to-date top-line growth of 7.2% was in line with our full-year forecast for mid-single- to high-single-digit revenue growth. Adjusted GAAP operating margins of 24.0% during the first nine months of 2018 were 70 basis points lower year over year and at the lower end of our forecast range of 24%-26% for the year.