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Shares of AllianceBernstein Holding (NYSE:AB) have lost a bit of ground over the past week after the investment firm announced the acquisition of W.P. Stewart.

Despite a decent correction in recent months, the overall valuation of AllianceBernstein remains uncertain amidst unstable dividend payments and the threat to its long term business model.

The Deal

AllianceBernstein announced that it has entered into a definitive agreement under which it will acquire W.P. Stewart (OTCPK:WPSL). W.P. Steward manages $2 billion in assets for institutional and retail clients in the US and Europe.

AllianceBernstein will pay $12 per share for each share in W.P. Stewart. Shareholders will hold transferable contingent value rights with a value of upto $4 per share if assets under management will reach $5 billion within three year's of closing. As such the deal values W.P. Stewart at $60 million, or $80 million including the full value of contingent value rights.

W.P. Steward will be added to AllianceBernstein's operations which manage some $444 billion in assets under management. W.P. Stewart will gain access to AllianceBernstein's research team.

CEO and Chairman Peter S. Kraus commented on the rationale behind the deal, "I'm excited to be adding W.P. Stewart's complementary concentrated growth equity services and strong bench of talent to our equity platform."

The deal is expected to close within four to six months and is subject to customary closing conditions, including regulatory approval.

Valuation

AllianceBernstein generated $1.44 billion in revenues for the first six months of the year. The company net earned $79.1 million for the period on average assets under management of $445.9 billion.

At this rate annual revenues could approach $3 billion if sentiment across equity markets remains robust. Net earnings could approach $160 million.

Trading around $20 per share, the market values AllianceBernstein at around $2.1 billion. This values assets of the firm at 0.7 times annual revenues and around 13 times annual earnings.

AllianceBernstein currently pays out a fat quarterly dividend of $0.41, providing investors with a impressive dividend yield of 7.7%.

Some Historical Perspective

Long term investors in AllianceBernstein have seem poor returns, although they have been compensated by a relative high dividend yield.

Shares rose from $30 in 2003 to highs in their nineties back in 2007. Shares have slumped to $15 in 2009 amidst the financial crisis and have traded in a $10-$30 trading range ever since.

Shares have risen some 15% year to date although shares trade at just $20 at the moment, down from highs around $27 in May.

Investment Thesis

Shares in AllianceBernstein have lost almost 10% of their value over the past trading week. Concerns about rising interest rates and the impact on equity markets have scared off investors.

Investors are not too happy with the small deal either. AllianceBernstein pays roughly 3% of its current market capitalization to acquire W.P. Stewart which only adds 0.5% in assets under management.

As such AllianceBernstein pays three cents for every dollar under management at W.P. Stewart. This compares to its own valuation of merely half a cent for every dollar under management, which implies a 500% premium. Note that W.P. Stewart's relative revenues could be higher, but no additional financing details were released in the press release.

The main reason to invest in AllianceBernstein is the dividend which provides investors with a fat yield of 7.7% at the moment. Yet note that the dividends are not stable and fluctuate with earnings, which is important to remember as the long term headwinds of increased attractiveness of ETF's undermines AllianceBernstein's business model.

Shares are up 55% over the past year amidst the broader market rally, despite a 25% sell-off over the past three months. While the short term appeal is increasing on the back of relative favorable conditions in equity markets and the current dividend yield, I remain cautious.

At current levels capital losses on an investment could easily outweigh the fat quarterly paycheck.

Source: AllianceBernstein Holding - Little Appeal Despite Fat Dividends