CORRECTED-Analyst: State Street unit worth up to $3.8 bln

Fri Mar 23, 2012 12:48pm EDT

* Bernstein report: SSgA sale poses strategic risk

* Nelson Peltz's Trian Partners has been pushing for spinoff

* State Street shares have rallied over past several months

March 23 (Reuters) - State Street Corp's asset management unit, which activist investor Nelson Peltz says should be spun off, is worth up to $3.8 billion, Bernstein Research analysts said on Friday.

However, State Street could lose the ability to offer competitive pricing if it were to spin off or sell State Street Global Advisors, Bernstein analyst Brad Hintz said in his research report.

Boston-based State Street has said it does not want to spin off or sell the second-largest asset manager in the world with $1.86 trillion in assets under management.

Hintz said SSgA's value as a spinoff is somewhat diminished because its 27 percent profit margin is well below the mid-30 percent range generated by many asset manager peers.

SSgA may be better off remaining part of the parent company, Hintz said.

"Some believe having a full-scale internal asset manager is a strategic imperative in the custody business," he said in the report.

State Street Chief Executive Jay Hooley says most of the company's top investment servicing clients use SSgA to manage a portion of their assets.

Peltz, the billionaire who runs Trian Partners, is pushing for a sale of SSgA. Trian, which owns about 3 percent of the company's stock, has criticized State Street's compensation spending and stock price. But State Street shares have surged more than 30 percent since Trian's critique of the company became public in October.

Scott Powers, SSgA's top executive, may provide more color on the debate on Friday afternoon when he gives a presentation at the UBS asset gathering conference.

Meanwhile, analyst Hintz said in his report that SSgA might better maximize profits as a separate entity.

"However, since we believe SSgA's valuation is not overlooked, we think an SSgA sale may not justify the unintended strategic risks," he said. "At the very least management should concentrate on improving SSgA's margins and consider providing better disclosure around cost allocations."

Hintz valued SSgA between $2.6 billion and $3.8 billion, using methods that included discounted cash flow analysis and comparisons to other asset managers. State Street's current market capitalization is $22 billion. The company's stock is up 2.75 percent over the past year, outperforming the 4.4 percent decline on the Dow Jones U.S. Asset Managers Index.

State Street shares were up 0.6 percent at $45.27 on Friday morning on the New York Stock Exchange.

SSgA is unique among large asset managers because most of its client assets are managed passively through index funds and exchange-traded funds. Its S&P 500 Index ETF and gold ETF rank among the most popular ETFs.

State Street management said the synergies between the company's custody business and SSgA are an important part of its strategy. But Hintz said his discussions with the company suggest State Street rarely, if ever, bundles custody and asset management to new clients.

Nevertheless, Hintz said it is clear that SSgA's assets under management represent nearly 10 percent of the parent company's assets under custody, adding scale to the servicing business.

"The loss of this client could, therefore, reduce State Street's ability to offer more competitive pricing," Hintz said. "However, the point is whether State Street has been optimizing the pricing decisions across both businesses. If the firm is using asset management cash flows to subsidize acceptance of uneconomic returns in servicing, and vice versa, this could arguably destroy value in both businesses."

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