“Hastings sale on track.” That was the 18 December headline published by Australia's Business Review, essentially confirming what followers of the deal were anticipating – a March/April close for Westpac's sale of Hastings Funds Management, after the bank garnered interest from a number of heavyweight bidders, including eventual frontrunners TIAA-CREF and MassMutual Financial Group.
Come March 1, Westpac did indeed wind down the sale of Hastings, but not quite in the way we expected. “For various reasons, including current external market conditions, Westpac and the relevant parties have elected to cease strategic conversations and due diligence with respect to a possible purchase of Hastings,” read Westpac's brief statement.
And thus unceremoniously ended Westpac's attempt to offload Hastings, after indicative bids came in far below Westpac's A$500 million target, reportedly valuing Hastings at a price/earnings multiple of 8 to 10 times and nixing the process before its March 11 second round bid deadline.
Market conditions aside, there was another momentous change between late December and early March – the end of January departure of Peter Taylor, Hastings' recently installed head of global investment and global asset management, who had been in his post for only three months.
Taylor, a well-known industry veteran who had been with Hastings since 2000, had taken the lead on a number of marquee deals, including the much-vaunted A$10.3 billion acquisition of TransGrid. Other notable transactions he helped secure include Port of Newcastle and Phoenix Natural Gas as well as the acquisition of stakes in Queensland Airports, Sydney's desalination plant, South East Water and Ballarat Water. And of course, Taylor was instrumental in setting up Hastings' North American business.
Our sources told us there was no animosity surrounding Taylor's departure. Essentially, Taylor was made an offer he couldn't refuse, allegedly to join Carlyle. If he does pop up at Carlyle later this year, that would make a lot of sense. After all, the US asset manager is the largest shareholder (11.5 percent) in Qube Holdings, which, together with Global Infrastructure Partners, is currently bidding for Australian logistics and ports operator Asciano.
Carlyle did not wish to comment on a possible Taylor hire.
What might have potentially spooked the likes of TIAA-CREF and MassMutual were some of the other circumstances surrounding Taylor's departure. According to our sources, Taylor was not under any retention arrangements with Westpac/Hastings.
In addition, his departure came after the first vesting of a long-term incentive scheme late last year that put several Hastings employees in line for sizeable bonuses. Our sources told us that last year's vesting did not allow eligible employees to cash out. But that doesn't mean prospective bidders wouldn't be looking at how vesting will take place going forward – and especially when key employees are allowed to monetise their incentives.
We reached out to Westpac for comment, but a spokesperson directed us to the bank's previous statement on the end of the sale.
With that in mind, it seems reasonable to conclude that prospective buyers might have feared further senior departures for what would be their newly acquired infrastructure platform and decided to price that into their bids.
From a bidder perspective, future expected revenues are the key in an acquisition like Hastings. Potential buyers want to understand the resilience of existing cashflows and funds under management, not to mention any performance fees to be earned over and above what the business is generating today.
Fears of a brain drain are precisely the kind of thing that can cast a cloud on that, especially if you subscribe to the view held by some in the market that Hastings' latest deals have been done at somewhat high multiples, requiring considerable discipline and expertise to make the most out of those assets.
Transgrid, for example, was acquired at around 1.55 times its regulated asset base. In a note following the sale, Citi Research issued a 'sell' recommendation for Hastings consortium partner Spark Infrastructure, saying it found it “hard to be positive around long-term value given the high price paid [for Transgrid]”.
So what's next for Hastings? It's still early days, but apparently Westpac is considering a range of options, including an IPO, a sale to a local rival or even holding on to Hastings. It will be interesting to see if the eventual denouement sheds light on any of the above.
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