Brookfield Asset Management: Cashed Up and Ready to Buy

Thanks to a number of recent financings and the sale of 15 hydroelectric plants to Great Lakes Hydro Income Fund (GLHIF.PK) last week, Brookfield Asset Management (BAM) has money to burn. Deployed properly, that cash can lead to healthy upside in the current stock price, says Scotia Capital analyst Cherilyn Radbourne.

"We estimate that BAM has roughly ~C$2.4B of corporate liquidity available to pursue opportunistic acquisitions." she said in a note to clients.

With scant near-term debt maturities, well-capitalized subsidiaries and modest working capital requirements, Ms. Radbourne said Brookfield is in position to pursue distressed acquisitions of a number of major real estate companies and portfolios.

The company's last letter to shareholders indicated that BAM has particular focus on office and retail assets in the U.S., U.K. and Australia.

The analyst wrote:

Among those target markets, the U.K. office market stands out as particularly distressed, given the combination of demand destruction, and use of loan-to-value covenants.

Canary Wharf, in particular, stands out as a potential target on BAM's 'watchlist' given that Songbird PLC, which owns 60.8% of the Canary Wharf Group, has indicated there is a material risk it will breach the covenants on an £880M loan in November 2009.

Investing alone, Ms. Radbourne said BAM has the ability to execute a deal in the range of C$5-billion to C$6-billion, including leverage. In turn, that could create roughly C$3.60 per share of value or 22% of the current stock price.

A more likely scenario, however, is for Brookfield to attract third-party capital to invest alongside it. In this case, the total leveraged acquisition potential increases to C$15-billion, creating approximately C$5 per share of value or roughly 31% of the current stock price.

When combined with Scotia Capital's current target price of C$11.50 for Brookfield Properties (BPO), a subsidiary of BAM, the potential value created from distressed acquisitions, could result in 8% upside to Brookfield Asset Management's current share price, Ms. Radbourne said.

She maintained her "sector outperform" rating and left her 1-year price target at C$24.75 per share.

Comments

[jerrydd:]

Let's see selling hydro which is like printing money from their income which is only going up in price to buy real estate?

I just hope the got paid a lot for those Hydro plants or that's going to be a very bad deal. As energy costs are going up with bullet when the economy returns one has to wonder just what this management was thinking!! Maybe it's to boost their salaries as it's doubtful risky real estate could be better over 10 yrs.

Jul 17 10:43 AM

[Trane250:]

BAM (then known as Brascan) was a big player in metals mining through control of Noranda, which in turn controlled Falconbridge. They sold their mining assets cheap to Xstrata just before the huge runup in metals prices. Let's hope that they have better luck with this move.

Jul 17 11:13 AM

[UncleLongHair:]

BAM netted $1.1 billion in profit from the sale of Falconbridge (after taxes) so I don't think it is fair to say they sold it cheap. This was sold in 2005 before the big manic run-up before the 2008 market crash but there was plenty of appreciation. These proceeds funded some of the hydro deals which ended up being very profitable as well.

The recent sale of hydro assets was just a partial sale, a 50% interest in certain assets. They still own a majority of them. This just seems like an example of "selling high to buy low". Obviously, there are numerous opportunities today for that money. I think it will be interesting to see what they do.

Jul 20 07:45 AM

[Dan Braem:]

As with other conglomerates, this company is tricky to value and takes more time to understand. However, it is difficult to argue that the company has good liquidity and generates good cash flow.

Per the 2008 annual report, the company claims it generates $1.5B FCF annually (with a market cap of 10B, this equates to 15% FCF yield). Of course, the 1.5B is subject to fluctuate.

I own shares, I have written puts at $12.5 to buy more shares, and feel that this company has a great future. Although real estate and timberlands are not in favor now, these are long-term assets that generate cash for years and years. Compare these types of assets to IP of pharmas or inventory at retailers and I think it makes sense that it is good to buy the BAMs of the world when real estate is cheap and out of favor. Tack on the power generation and you have a good long-term formula.

Jul 21 01:15 PM

[tc1:]

For the record, my prospectus on Great Lakes Hydro Income Fund says that GLHIF is paying $945 million for the Brookfield assets and that an outsider analysis reported a fair value range of $900M to $1.1B for these assets.

Aug 19 11:48 AM