By Rahul Mepani, Athean Myat, Suchritha Patlolla, Kevin Hwang and Josh Figueroa (Cornell University), Lucy Chen and Jessica (University of Melbourne)
Overview of the deal
Acquirer: Apollo Global Management (NYSE: APO)
Target: Athene Holding (NYSE: ATH)
Implied Equity Value: $11B
Announcement Date: 8 March 2021
Expected Close Date: January 2022
Acquirer Advisor: Barclays
Target Advisors: Lazard, Houlihan Lokey
Investment manager Apollo Global Management and retirement services company Athene Holding has entered into a definitive agreement to merge in an all-stock transaction. The deal implies an approximate total equity value of $11 billion for Athene, with 1.149 shares of Apollo to be exchanged for each Athene share outstanding. Apollo shareholders will own about 76% of the combined firm at completion, with Athene owning the remaining 24%.
Athene and Apollo have been long-standing strategic partners, with Apollo already the largest shareholder in the annuity seller with a 35% stake. The merger is expected to combine two growth companies that provide high-demand products and services within investment returns and retirement income. Key benefits from the transaction are believed to result from increased coordination and alignment, rather than consolidation. These include the simpler regulatory profile of the combined business, enhanced credit and rating profile, greater share liquidity, and a simpler corporate structure.
The deal will help accelerate the strategic plan of Apollo creating a leading global solutions provider with a solid capital base. It is expected to be highly financially accretive at 68% per share based on 2020 combined after-tax earnings. There have however been concerns raised around the instability and dependence of both companies on each other. Athene currently makes up 40% of Apollo AUM and generates 30% of its fee-related earnings, while Apollo manages 100% of Athene’s assets.
“Coming together in this merger is a logical and exciting next step that will simplify our relationship while driving significant strategic and financial benefits in both the immediate and long-term future.” - Jim Belardi, Chairman and CEO (Athene)
Company Details: (Acquirer - Apollo Global Management)
Apollo Global Management is a leading global alternative investment manager specialising in private equity, credit, and real assets. It raises, invests, and manages funds on behalf of prominent pension, endowment, and sovereign wealth funds, as well as other institutional and individual investors. As of December 31, 2020, the firm had approximately $455 billion total assets under management including $328.6 billion in credit funds, $80.7 billion in private equity, and $46.2 billion in real assets.
Founded in 1990, headquartered in New York City, New York (USA)
CEO: Marc Rowan
Number of employees: 1700
Market Cap: $22.74B (as of 22/04/2020)
LTM Revenue: $2.35B
LTM EV/Revenue: 11.84x
Company Details: (Target - Athene Holding)
Athene Holding is an insurance company that provides retirement savings and institutional services. Its primary service is to provide policyholders preparing for retirement with fixed, multi-year guaranteed, immediate, and other various annuities. Before the announcement, Apollo owned 35% of Athene Holding. As of 2020, the firm $36.79 billion in net premiums and deposits.
Founded in 2009, headquartered in Pembroke, Bermuda
CEO: James R. Belardi
Number of employees: 1350
Market Cap: $10.91B (as of 22/04/2021)
LTM Revenue: $14.76B
LTM EBITDA: $6.68B
LTM EV/Revenue: 0.45x
LTM EV/EBITDA: 1.0x
Price/Book Ratio: 0.58x
Combined Ratio: 110%
Projections and Assumptions
Under the announced terms of the merger, each outstanding Class A common share of Athene will be exchanged for 1.149 shares of Apollo common stock, representing a premium of approximately 16.5% to Athene’s last closing price. This deal is expected to be completed in January 2022, creating a merged financial conglomerate with a market capitalization of almost $30bn.
One immediate result from the merger will be structural changes to create a simpler and more transparent corporate structure. The close ties and conflicting interests between Apollo and Athene have angered many investors in the past. In 2019, two Athene shareholders launched a lawsuit against the firm and claimed that Apollo used its influence over Athene to award itself “exorbitant” fees. Apollo has proceeded to cut its voting stake to address these concerns and offer compensation to the insurer. The recent merger announcement indicates that Apollo has sought to correct any misalignment issues and eliminate distinctions between the two groups.
After the merger is completed, Marc Rowan, who co-founded Apollo 31 years ago, will step up to the role of CEO of the merged group. Additionally, the shares that currently provide special voting rights to Leon Black (the current board Chairman of Apollo) and other executives will be cancelled, by January 2022.
Furthermore, Apollo estimates its earnings in 2021, on a tax-free basis, will at least double as a result of the merger.
One aspect constantly highlighted in the Apollo Athene merger is the improved alignment following the transaction. Apollo will take less time as a single firm, creating and launching new products, increasing speed to market and value for its shareholder base. This will help Apollo launch its new funds, such as Apollo Origination Partners, the Navigator Aviation Fund, and its Credit Secondaries Fund at a quicker pace. Additionally, this capital will expand the firm’s Pension Risk Transfer products to the UK, projected to have $41.6 billion in risk transfer deals and grow in successive years.
Another long-term growth factor is the access to Athene’s annuities as a consistent source of capital. Before the transaction, Athene was already Apollo’s largest asset management client, making up 40% of Apollo’s AUM and 30% of its fee-related service revenues. However, Apollo was unable to fully realize the opportunity for excess return and earnings, with Marc Rowan describing the firm’s stake in Athene as “a $2.5 billion asset on our balance sheet that generates no earnings”. With the merger, Apollo will fully utilize the fixed income from annuities and other resources. This dry powder is estimated to be around $10.8 billion, giving Apollo inexpensive, accessible capital for future transactions.
Risks and Uncertainties
While Marc Rowan and other executives have touted the merger as a logical next step, the complexity or growth predicted leaves Wall Street skeptical. Apollo seeks to transition itself from a buyout firm to an alternative asset management firm with this transaction. While price targets have increased since the announcement, doubts remain about whether the firm’s entry into the annuity market is the right one.
One possible risk could be the potential of souring interest rates from Athene’s annuities. Fixed Rate and Index annuities each formed 43% of the firm’s entire annuity products in 2020. While both products are fine under current market conditions, a shift or economic downturn can prove harmful for Apollo as they pay annuities out at their minimum benefits, which would be at a loss.
Another potential risk from Athene would be how it reacts to the transition process from LIBOR. Currently, Athene has $24.1 billion or 57% of its contract values tied to LIBOR, which by 2021 will cease to have new contracts and by 2023 cease to exist. While LIBOR rates will still be published until 2023, any pitfalls or delays in the transition process may cause fluctuations in Athene’s revenues. This can prove disastrous for Apollo if it seeks to utilize capital from Athene while it has an operating blip.
“There is little to be derived from cost-cutting here and much to be derived by simply doing things smarter. We are both growth companies. We come at this with a growth mentality. And that's what this transaction is about.” - Marc Rowan, CEO (Apollo)