O.C.’s Pimco in Talks to Sell to German Firm
In a deal that could be worth as much as $5 billion, one of Orange County’s preeminent corporations and the nation’s largest bond-fund manager is in talks to sell all or part of its assets to a European insurance giant.
Newport Beach-based Pimco Advisors Holdings LP, which manages $250 billion for corporate, municipal and individual investors, has held preliminary talks with German insurance company Allianz AG, industry sources said.
The deal being discussed would greatly expand Pimco’s presence overseas and--if it involves the sale of the whole company--result in by far the highest price ever paid for an Orange County company. By comparison, PacifiCare Health Systems Inc. of Cypress paid $2.2 billion for rival FHP International Inc. of Santa Ana in 1997.
Officials at Pimco and Allianz declined to comment.
It is unclear what a deal with Allianz or any other potential buyer might mean to Pimco’s 1,200 employees--many of whom are highly specialized and highly compensated. Almost half the company’s employees work in Newport Beach. Analysts said Pimco likely would remain intact, acting as the U.S. arm of a European parent.
That’s important because Pimco is known worldwide in financial circles, and its name is frequently used by Orange County economic development officials trying to persuade other businesses to relocate here.
Two of the county’s other giant companies, Rockwell International of Costa Mesa and Avco Financial Services of Irvine, announced this year that they are relocating to other states. At the time, the moves were bemoaned by Stan Oftelie, executive director of the Orange County Business Development Council, as “part of a trend we’re seeing of major headquarters leaving Southern California” because of a spate of industry consolidations.
The money-management industry in which Pimco is a key player also is caught up in consolidation. One of the prizes that makes Pimco attractive is bond market superstar William H. “Bill” Gross, one of the company’s top executives and manager of its industry-leading Pimco Total Return Fund.
The fund attracted almost $4 billion in new investor money in the first five months of this year, making it the best-selling bond fund in America.
“It is clearly the flagship product for the whole company,” said Guy Moszkowski, an analyst at Salomon Smith Barney Inc.
That huge inflow of cash boosted the fund’s assets to a whopping $27 billion, according to Financial Research Corp. Pimco Total Return has grown at an annual rate of 8.5% over the last five years, exceeding the average 7.8% annual return of rival bond funds, according to Bloomberg Fund Performance.
Pimco was formed in 1994 when it was spun off from Pacific Life Insurance Co., one of the first large financial service businesses to relocate to Orange County from Los Angeles.
Pacific Life--then Pacific Mutual--moved to Newport Beach in 1971 and has been called a magnet that helped draw numerous other financial businesses to the area. The company has been a major presence in the county ever since, supporting a variety of charities and arts organizations.
While the loss of Pimco and its Pacific Investment Management Co. subsidiary would be troubling to business and community boosters, they can take heart from industry analysts’ insistence that Pimco has no pressing need to sell to Allianz--or any other would-be acquirer.
“I don’t think there’s any urgency on Pimco’s part,” says Geoff Bobroff, an industry consultant in East Greenwich, R.I.
Any transaction would require approval of Pimco’s senior managers, who collectively own 22% of the company and stand to make big profits from a sale.
Pimco is a holding company for five firms that together manage investments in 50 separate bond and stock mutual funds. Clients include about 1,600 corporations, government agencies and institutions, including many of the largest corporations in the U.S.
These institutional investors account for 64% of the funds Pimco manages--most of the money coming from their employee pension programs. The remaining 36% are from individual investors who purchase shares of Pimco mutual funds through brokerage houses.
Pimco’s limited partnership units rose 14.6%, or $4.31, to $33.88, in heavy New York Stock Exchange trading on word of the potential sale Wednesday. The gain was the biggest jump for the units since they began trading when Pimco was spun off from Pacific Life.
Allianz shares, which trade on the Frankfurt stock exchange, rose $2.55 to $299.40.
Pimco’s units could fetch about $45 each if the entire firm were sold, analysts said.
“Pimco has said it would be open to a sale or merger if the price were right,” said Luke Fichthorn, an analyst with Lazard Freres & Co. in New York. “One of its frustrations is that its units trade at a discount because a large number of mutual funds and pension funds can’t own them for tax and other reasons.”
The 44% of the company’s units that are publicly held typically trade based solely on the current yield from dividends. “And that’s not a good indicator of long-term outlook,” Fichthorn said.
The talks between Pimco and Allianz reflect larger trends in the rapidly maturing asset-management industry. There is a perceived need to get bigger in order to stand out in an ever-crowded mutual fund market. Over the past 29 months, there have been no fewer than 49 mergers among asset-management firms, according to Barrington Research Capital analyst Alexander Paris Jr.
One reason the increasingly profitable company might be interested in an overseas suitor is that, like many other U.S. money managers, it is eager to take its financial products into largely untapped foreign markets, which present major growth opportunities.
“Europe is particularly seeing some fundamental changes in its retirement-savings markets,” notes Morgan Stanley analyst Henry McVey. In fact, Europe appears to headed toward a private retirement system modeled on the U.S. 401(k) plan.
Pimco has long coveted the lucrative European and Asian markets, industry analysts said, and sees a combination with a well-known firm like Allianz as the fastest way to open up overseas distribution channels.
“Distribution is key,” says Scott Weiner, who heads Metzler/Payden, a joint venture between Payden & Rygel, a Los Angeles money manager, and Metzler Bank of Germany.
One of the reasons that Payden & Rygel partnered with Metzler last year was to tap its established distribution sales force, Weiner said.
“That gives you instant entree into Germany, which in turn gives you entree into the rest of Europe,” he said.
Pension assets--the primary source of money typically invested in Pimco’s funds--total almost $1.5 trillion in the Pacific Rim nations and are expected to soar to $2.3 trillion over the next four years.
European pension assets, now estimated at $2.7 billion, are expected to increase by 44% to $3.9 billion in the same period. Yet only about $14 billion of the assets managed by Pimco comes from overseas sources, analysts said.
Pimco’s stock funds have been struggling as performance at its Oppenheimer Capital and Columbus Circle units has lagged, said Paul Becht, director of research at Crawford Investment Counsel, an Atlanta-based money manager that owns about 525,000 Pimco units.
In fact, Pimco has been refocusing its business and last week sold the Columbus Circle Investors Inc. unit to the firm’s executives to concentrate on its two biggest units.
They are Pacific Investment Management, which has $165 billion of assets, all in bond funds, and Oppenheimer Capital, with $60 billion invested in stock mutual funds.
Stock funds are a faster-growing part of the overall U.S. mutual fund business, attracting more than three times the investment money as bond funds did this year.
But almost two-thirds of Pimco’s assets under management are invested in bonds and other so-called fixed-income securities.
“Pimco’s stock-fund business isn’t growing as rapidly as the bond-fund business, and getting a global geographic reach would help,” said Ben Wei, an analyst at Crowell, Weedon & Co. in Los Angeles.
It isn’t clear whether Allianz is considering purchasing the entire company, the 22% stake held by insiders or the 33% of Pimco still owned by Pacific Life.
But Allianz, which is Europe’s second-biggest insurer, has said that it intends to grow and that it wants to develop asset management as one of its principal businesses.
In a speech to shareholders Wednesday, Allianz Chief Executive Henning Schulte-Noelle said the company wants to take a leading position in the industry to avoid being “pushed onto the defensive as a victim of market developments.” It is part of the company’s strategy to grow through acquisitions “if they fit with our goals,” he said.
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Bloomberg News contributed to this report.
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* BOND STAR: Pimco’s William Gross is known for parlaying a conservative approach into high returns. C1
