A New Take on Onex

May. 6.10 | About: Onex Corporation (ONEXF)

By Andrew Willis

Not too long ago, Onex (OTCPK:ONEXF) watchers would do handsprings when the private equity pioneer signaled it was about to sell a holding.

Cashing in on an investment, you see, demonstrated that Onex’s value creation magic was still working. Parting with a portfolio company, via an IPO or sale to a rival, would boost a stock that traditionally traded at a discount to the perceived value of its holdings.

Well, Onex founder and CEO Gerry Schwartz announced Wednesday that the company contemplates initial public offerings in coming months. (Mr. Schwartz didn’t give details, but Husky Injection Molding Systems and a U.S. service contract provider called The Warranty Group are the companies most likely to be coming soon to an exchange near your.)

And analysts took absolutely no notice.

There has been a subtle but important change in the way the financial community values Onex, a shift that very much works to Mr. Schwartz’s benefit.

Onex is no longer perceived as a deal machine, with its fortunes rising or falling based on the perceived value of one or two key holdings. Celestica's ups and downs, for example, used to exert an enormous influence on parent Onex.

Several years of tough slogging to raise outside funds - the company pulled in an impressive $3.9 billion (U.S.) in its last outing - has transformed Onex into a company with far more predictable earnings, and that is expected to translate into a premium valuation. (Brookfield Asset Management (NYSE:BAM) has done the same thing, on a larger scale.)

So when Mr. Schwartz laid out Onex’s latest financial results late Wednesday - along with his musings on IPOs, the boss said first-quarter revenues fell 10% to $5.8 billion and operating earnings were down 13% to $457-million – analysts focused on the shift in the business.

“Onex remains one of the best managed, diversified and debt-free private equity companies,” said a report from Tasneem Azim at UBS Securities, a firm that also follows Onex rivals such as Blackstone and Fortress.

“We see significant value creation potential from its assets under management business, with fee-generating assets now constituting 63% of its asset base versus 30% in 2004.”

UBS is bullish on Onex’s prospects.

“We believe upside from current levels is underpinned by increased investment/M&A activity, a cyclical re-rating of Onex’ public holdings, and growth in management/performance fees.”