Talk of Fortress expansion spree overblown

NEW YORK (Reuters) - Rumors of an acquisition spree by Fortress Investment Group (FIG.N) are greatly exaggerated and may disappoint investors who jumped into the stock during the past week.

The private equity and hedge fund giant last week named director and former Fannie Mae FNM.N Chief Executive Daniel Mudd as its new CEO. The move frees co-founder Wesley Edens and his partners to focus on buying assets and companies made cheap by what he calls the "Great Deleveraging" of the past year.

Last week, the Financial Times reported Edens told employees during a meeting that Mudd would spearhead the firm's acquisition efforts.

Expectations of a shopping spree put a charge in Fortress' beaten down stock. The shares, down 87 percent since its 2007 IPO, are up 21 percent since the news report.

However, the comments reiterate what Edens has said in past quarterly conference calls. Analysts say the firm is unlikely to stray from its core leveraged buyout and hedge fund activities.

"There are a lot of options on the table for Fortress, but there were lots of options before Daniel Mudd became CEO," said Barclays Capital analyst Roger Freeman. "The way I view it is (Mudd) was already on the board, so that's not new."

The five co-founders also own more than 70 percent of Fortress stock.

Edens, introducing Mudd to the troops, said the firm was open to a range of acquisition opportunities. But analysts said that does not necessarily signal a strategic expansion or deals that will turn a quick buck.

Fortress spokesman Lilly Donohue declined to comment about the meeting or the firm's strategy. Fortress reports second quarter results next week.

Fortress, which manages more than $26 billion of assets, was the first U.S. hedge fund and private equity firm to go public, yet its profit and stock price have been squeezed by the credit crisis. The Fortress founders are well-regarded as savvy investors, but never ran big publicly traded companies.

Mudd's appointment "allows Wes and all the senior partners to really focus on their own jobs. Being a publicly traded company there is a lot more stuff they ended up having to do than if they had stayed a private partnership," said Roger Smith, analyst at Fox-Pitt Kelton.

Analysts observed that Mudd brings Fannie Mae connections that could aid Fortress' efforts to acquire depressed mortgage assets. Whether Mudd will drive a change in strategy is debatable, analysts said.

Fortress management has talked about the opportunities created by Wall Street, banks and hedge funds all scrambling to sell assets and raise cash.

Eden's "talked about 'the Great Deleveraging.' That could mean buying a bank, buying parts of banks, starting funds on the distressed-credit side," Smith said. "I don't know whether any of this stuff is new."

One promising avenue is the takeover of other hedge funds.

Fortress last month took over about $2 billion of assets and 100 employees from D.B. Zwirn & Co, a credit fund that announced it was closing last year. Fortress is expected to realize hefty gains on positions purchased at a discount.

Fortress has said it would pursue more such deals.

Edens and Fortress' co-founders made a fortune snapping up bargains from the wreckage of the U.S. savings & loan crisis 20 years ago. And while buying distressed banks and their assets could generate some big bucks down the road, investors should not expect immediate gains, analysts said.

To some extent, Fortress needs to bolster its private equity and "hybrid" fund businesses to offset weaknesses in its hedge funds, which suffered big losses last year and were bleeding assets before Fortress imposed gates.

The firm's "Drawbridge" global macro fund is trading below its previous peak and so is unlikely to generate hefty performance fees this year. The hedge fund business, about a third of Fortress, has been scaled down, analysts said.

One possibility, Freeman said, is Fortress diversifying its "alternatives" business by acquiring traditional "long-only" asset management firms where client funds are less volatile.

Fox-Pitt's Smith has an "inline" rating on FIG shares, making the conservative assumption of no performance fees at all from its hard hit hedge and buyout funds.

"I feel like these shares offer a call option on the performance fees, which will return as these private equity funds do better," Smith said.

(Reporting by Joseph A. Giannone; Editing Bernard Orr)