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Rating:So Security Benefit is Buying Rydex. Now What? Not Rated 2.6 Email Routing List Email & Route  Print Print
Tuesday, July 03, 2007

So Security Benefit is Buying Rydex. Now What?

Reported by Neil Anderson, Managing Editor

If Rydex really sold for close to a billion dollars, competitiors might be pushed into play and Security Benefit might start restructuring things to increase its return on the deal. But what really happened to the price and what's in store for Rydex and its niche. Read on to find out.

See "Rydex Says Yes to Security Benefit", June 28, 2007, for more details on the deal. See The Rydex Sale: Anatomy of a Story", June 28, 2007, for a look at how the sale of Rydex has evolved since last fall.

Pricing

Deal pricing often helps shed light on buyers' future plans for their acquisitions. However, since Rydex and Security Benefit have declined to disclose the terms of this deal, figuring out what those undisclosed terms mean is a bit more challenging than usual.

MFWire sources have cited prices ranging from $200 million for a mere controlling stake up to $670 million (10 times Rydex's EBITDA), while possible price tags floated prior to the deal in other publications reached $800 million to $1 billion. (See "The Rydex Sale: Anatomy of a Story" above for more on reported pricing.) However, we have yet to confirm any specific price post-deal.

Both Security Benefit chairman and CEO Kris Robbins and Rydex CEO Carl Verboncouer told reporters that they are not planning to make cuts in either organization, perhaps indicating that Security Benefit did not pay too high a price. (See "Why Did Rydex and Security Benefit Do It?, June 28, 2007, for more on Robbins and Verboncouer's conversation with the media.)

If the firm had overpaid, they might be more aggressively searching for ways to increase Rydex's margins by reducing expenses (or perhaps the two firms expect enough total turnover throughout the whole sale process to reach whatever reduction Security Benefit may be looking for).

An industry insider agreed that the price was probably not on the high end.

"The fact that no price has come out says to me that it's low," one source told MFWire.

Either way, pay attention to the price if it surfaces, as it may affect Rydex's future size. Industry insiders pointed to possible reduction targets in Rydex departments like operations, compliance and marketing.

Distribution

Instead of stressing efficiencies (or other potential codewords for cuts), Robbins and Verboncouer both focused their remarks on distribution issues, hinting at new products (perhaps utilizing Rydex funds or ETFs inside of Security Benefit variable annuities) and aiming at the 401(k) marketplace. (See "Rydex Acquirer Leads the Fund Firm to DC Plans", June 28, 2007, on our sister publication, 401kWire [subscription-only].) Will Security Benefit win its distribution bet on Rydex?

Neil Bathon, founder of PMR Associates, worries that too many specialized groups are "jumping into the ETF marketplace," although he thinks Security Benefit might be able to come out on top.

"Some of these offerings may find some level of following among institutional outlets but I don't think there is likely to be enough asset flow to make the offerings profitable for the sponsor," Bathon told MFWire. "[But] I think they [Security Benefit] could get themselves in position to be one of the winners in terms of asset growth and market share gains over the next four years."

Other industry insiders worry that Rydex's roughly $1 billion in distribution through another retirement and insurance player, Nationwide, could be in jeopardy. Sources pointed to Skandia pulling out of Rydex and going to ProFunds a few years ago. However, a spokesman for Security Benefit says distribution through Nationwide will not be a problem.

"Security Benefit has partnered with Nationwide as well. In fact, they serve as a subadvisor under our NEA ValueBuilder program," the spokesman told MFWire. "We have every expectation that will continue, as will relationships with other Rydex partners like Wells Fargo, CLS or Linsco Private Ledger, to name a few." (Clarke Lanzen Skalla [CLS] Investment Firm subadvises Rydex's CLS AdvisorOne Funds.)

Branding

So far, officials at both Rydex and Security Benefit insist that Rydex will continue to operate as an independent unit, so perhaps the Rydex name will stick around, at least for now. But what of Security Benefit's existing funds? The firm already has a baker's dozen funds under its own Security Income Fund and Security Equity Fund brands. (Security Benefit also manages roughly $11 billion in institutional assets through its Sixth Avenue Investment Management brand.)

Will Security Benefit's fund unit continue to operate separately from Rydex and sell under its existing brand, or will Security Benefit part or all of the two units? Both firms have yet to comment on the fate of these funds.

More Deals?

Will the sale of Rydex push any of its competitors into play? Since Security Benefit is not yet a player in either leveraged funds or ETFs, the deal should not initially change Rydex's market share or position versus the likes of ProFunds, PowerShares (now owned by Invesco) and Direxion, so perhaps none will feel the immediate need to buy to regain positioning.

On the opposite side of the pressure coin, this may also be unlikely to push any of Rydex's competitors to sell, too. After all, the terms of the deal still have not come to light, giving no specific juicy dollar sign amount for other potential sellers to salivate over. And if the price of the deal was on the lower end as insiders have speculated, then the owners of firms like ProFunds might think twice before trying to follow such an act. 

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