UPDATE 4-Sun Life to keep fund manager MFS, stock falls

Mon Oct 23, 2006 4:58pm EDT

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(Adds closing share prices, more analyst comment)

By Nicole Mordant and Svea Herbst-Bayliss

VANCOUVER/BOSTON Oct 23 (Reuters) - Sun Life Financial Inc. (SLF.TO) (SLF.N) will not hive off fund manager MFS Investment Management, the Canadian insurer said on Monday, after failing to find the right deal or price for its Boston-based unit.

Shares in Sun Life closed down 2.4 percent at C$44.74 on the Toronto Stock Exchange after the news, which comes just over a month after it said it had hired bankers to advise on what it should do with MFS, the oldest U.S. fund company.

"We discussed the decision to continue to own MFS with management and learned that the issue was one of both price and finding the right strategic transaction, namely, taking back a significant minority position in a larger wealth management company," said analyst Mario Mendonca of Genuity Capital Markets in a research note.

Sun Life's decision to keep MFS changes the calculus in the $9.3 trillion U.S. mutual fund industry where MFS had been one of two Boston-based firms up for sale, analysts said.

They had expected to see greater interest in MFS, where profits have been rising, and possibly a price of at least $4 billion. That's above the likely price for Putnam Investments, which still struggles with redemptions.

Analysts said that MFS management's stake in the firm plus its wish not to be absorbed by another fund manager might have made it difficult to find a buyer. MFS management has options to own a 22 percent stake.

With MFS effectively off the table, shares in Marsh & McLennan (MMC.N), Putnam's parent, closed up 2.8 percent or 78 cents at $29.06 in New York.

"If two houses on a block are for sale and one goes off the market, the other is worth more," said Donald Light, insurance analyst with Celent LLC.

While MFS's assets under management have been climbing, the company has struggled to attract more investors to its mutual funds, an ironic turn as it pioneered the first U.S. mutual fund in 1924.

But, pre-releasing results from MFS, Sun Life said net income from the fund manager grew 37 percent to $52 million in the third quarter, while assets under management were worth $175 billion. That was up about 4 percent from the $168 billion in managed assets as of June 30.

Sun Life, Canada's second biggest insurer, will report group third-quarter results on Thursday.

For analysts, the numbers show that MFS has likely turned the corner, more than two years after settling a market timing scandal at a handful of its funds. However, some analysts remained disappointed by the absence of a deal.

"In the final analysis, MFS still lacks scale for investment in technology, marketing and overhead relative to larger competitors," said RBC Capital Markets analyst James Keating in a note.

For individual fund investors the news that MFS will stay with Sun Life may not have much of an impact. "I am fairly neutral on this deal falling through," said Morningstar analyst Laura Lutton, adding that MFS still has work to do on repairing its growth funds after some management changes.

Donald A. Stewart, Sun Life's chief executive, said there had been a "high degree of interest in partnering with MFS".

There had been widespread speculation that U.S.-based Mellon Financial Corp. MEL.N and Wachovia Corp. WB.N were finalists to buy MFS. But Sun Life spokesman Michel Leduc said on Monday the company "never planned on selling MFS," but had looked at other options, including a type of partnership.

That harks back to a transaction Sun Life did in 2002 when it combined its mutual fund assets with those of then recently-acquired Clarica, and sold them on to CI Fund Management for a 30 percent stake in the fund manager.

(Additional reporting by Blaise Robinson in Toronto and Ed Leefeldt in New York)

($1=$1.13 Canadian)

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