Gabelli Is Set to Take His Mutual Fund Operation Public
MARKET PLACE
By RICHARD A. OPPEL JR. -- February 10, 1999
NEW YORK -- Mario Gabelli plans to take his mutual
fund company public this week after agreeing to cut
his annual pay and to give his public shareholders
first crack at his best investment ideas.
Both conditions allowed him to line up underwriters for
the initial public offering, which is being viewed as
an indicator of investor appetite for asset management
companies. Money management firms have rebounded only
modestly from last summer's selloff, causing several
private ones, including Neuberger & Berman Inc. and
Offitbank, to delay plans for public offerings.
Gabelli, known for astute stock picks, hopes to sell 20
percent, or six million shares, of Gabelli Asset
Management Inc., which is based in Rye, and has $16.3
billion under management. That would leave him with a
controlling stake worth more than $250 million in the
company, which he founded in 1976.
After a disagreement with potential underwriters last
year, Gabelli agreed to cut in half, to 10 percent, his
annual take of the firm's aggregate pretax profits --
which would have amounted to more than $4 million in
the first nine months of 1998. But he will continue to
earn other fees, which have topped $20 million in
recent years, and will get a $50 million payout in
three years.
Gabelli and other executives will also be free to sell
their remaining shares after three years.
In securities filings, the firm says going public will
help it expand its products, recruit top money managers
and perhaps lead to acquisitions. Moreover, the firm
plans to increase its presence in mutual fund
supermarkets and 401(k) plans as well as prepare to
offer mutual fund shares over the Internet.
But some concerns remain whether investors will embrace
a company with a franchise so closely linked to one
person and whether the firm can expand distribution.
"The main issue with the Gabelli organization is its
very ragged and uneven distribution strategy," said
John Rekenthaler, director of research at Morningstar
Inc., the fund trackers in Chicago. The firm has the
potential for strong growth, he said, but it has a
history of "wacky promotional schemes" and a hodgepodge
of funds with and without sales charges. "They've been
run like a cottage industry, a little bit
unprofessionally even, at times," Rekenthaler said.
Unlike most money management firms, Gabelli's company
has thrived, in part, because of its namesake, whose
appearances on television programs and in financial
publications has made him one of the most recognizable
fund managers. "The company is Mario," said Geoff
Bobroff, a fund industry consultant in East Greenwich,
R.I.
To help insure that his public company would get the
benefit of his best ideas, Gabelli reversed himself on
a key issue. When he disclosed plans for a stock
offering last April, the proposal stated that he would
have "no obligation to resolve conflicts in favor of
the company or to refrain from competing with the
company."
Now, Gabelli will generally give the company a first
right of refusal on investment opportunities. The
change was eased, a spokesman said, by a decision to
exclude certain assets, like some hedge funds, from the
new public company.
Assuming the deal comes off at the $16 to $19 a share
expected by the underwriters, Merrill Lynch & Co. and
the Salomon Smith Barney unit of Citigroup, the stock
(symbol GBL) will trade at a discount to that of some
other fund companies. Based on earnings projections by
the underwriters, Gabelli stock would be priced at 13
to 16 times its expected earnings for 1999.
T. Rowe Price Associates trades at 21 times 1999
earnings, and Franklin Resources Inc. at 18. Gabelli's
valuation would be more in line with the 15 at
Federated Investors Inc. and the 14 at Waddell & Reed
Financial, both of whose shares have underperformed
since going public last year.
Rekenthaler of Morningstar said the Gabelli funds had
been good performers recently, paced by their
concentrations in media and telecommunications stocks.
The largest, Gabelli Growth, managed by Howard Ward,
posted a 30.3 percent annualized return for the three
years ended Dec. 31, and received a five-star rating
from Morningstar. The other top-rated fund, Gabelli
Global Interactive Couch Potato, managed by Gabelli,
posted a 27.2 percent annualized return over three
years.
A big determinant of the Gabelli firm's profits will be
how much Gabelli puts in his own pockets.
For starters, he earned portfolio management and
account executive fees of $23 million and $21.3 million
for 1997 and 1996, respectively. A spokesman for
Gabelli said the structure was "not going to change"
and that the compensation structure was the "same as
for everybody else" who managed money in the operation.
Gabelli has cut his incentive payment to 10 percent of
pretax income, from 20 percent last year. He will also
receive a $50 million payout in January 2002, with $3
million in annual interest payments on that deferred
sum.
The firm's total expenses related to Gabelli's
compensation would have topped $30 million out of total
revenue of $105.3 million in 1997.
Linda Killian, who specializes in new issues at
Renaissance Capital in Greenwich, Conn., is
enthusiastic about the offering, even with Gabelli's
hefty pay. "There's something to be said for the fact
that you do want someone of his caliber to be highly
compensated," she said, "because it serves as a great
incentive to produce good results."
Copyright 1999 The New York Times Company
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