Brookfield Oaktree Holdings, LLC current report, 13 March 2019

Business Context and Reporting Period

Company: Oaktree Capital Group, LLC (Oaktree)
Filing Type: Form 8-K (Current Report)
Date of Report: March 19, 2019 (Reporting event date: March 13, 2019)
Event: Entry into a Material Definitive Agreement (Agreement and Plan of Merger) with Brookfield Asset Management Inc. (Brookfield).

On March 13, 2019, Oaktree entered into a merger agreement to be acquired by Brookfield. The transaction involves a two-step merger structure where Oaktree will merge into a Brookfield subsidiary, followed by a subsequent merger of Oaktree's holding company (OCGH) into another Brookfield subsidiary.

Key Financial Metrics and Transaction Terms

Merger Consideration: Holders of Oaktree Class A Units may elect to receive either:

  • Cash Consideration: $49.00 per unit.
  • Share Consideration: 1.0770 Brookfield Class A Limited Voting Shares per unit.

Proration: Elections will be prorated to ensure no more than 50% of the aggregate consideration is paid in cash or shares.

Termination Fee: Oaktree is obligated to pay Brookfield a termination fee of $225 million under specified circumstances (e.g., failure to close by March 13, 2020, or change in Board recommendation).

Revenue Run-Rate Condition: Closing is conditioned on Oaktree's Closing Revenue Run-Rate being at least 82.5% of the Base Revenue Run-Rate.

Distributions:

  • Q1 2019 distribution capped at $1.05 per Class A Unit.
  • Subsequent quarterly distributions (if closing delayed past Sept 30, 2019) capped at $0.67 per Class A Unit, not to exceed 85% of distributable earnings.

Note: This filing does not provide specific revenue, profit, cash flow, or debt figures for Oaktree's current financial period.

Material Changes and Governance

Ownership Structure:

  • OCGH (Oaktree Capital Group Holdings, L.P.) holds approximately 92% of Oaktree's voting power and has agreed to vote in favor of the merger.
  • Institutional limited partners of OCGH will exchange 100% of their units for SellerCo units; other partners will exchange approximately 20%.

Post-Closing Board Composition (Initial Period):

  • OCGH Directors: Howard Marks, Bruce Karsh.
  • Brookfield Directors: Bruce Flatt, Justin Beber.
  • Joint Directors: John Frank, Steve Gilbert, Richard Masson, Sheldon Stone, Marna Whittington, Jay Wintrob.

Voting Rights: During the "Initial Period," Class B Units will have 10 votes per unit, while Class A Units will have 1 vote per unit. OCGH is anticipated to possess approximately 85% of the membership vote.

Outlook, Risks, and Contingencies

Conditions to Closing:

  • Approval by Oaktree members (Member Approval).
  • Regulatory approvals, including Hart-Scott-Rodino and Committee on Foreign Investment in the United States (CFIUS).
  • NYSE listing approval for Brookfield shares.
  • Completion of the OCGH Exchange.

Liquidity Mechanism (Exchange Rights):

  • OCGH limited partners may exchange vested units for cash, Brookfield shares, or notes starting in 2022.
  • Valuation methodology involves a 13.5x multiple on trailing three-year average fee-related earnings and a 6.75x multiple on net incentives.
  • Annual exchange caps apply (e.g., 20% in 2022, increasing to 35% by 2025).

Risks and Contingencies:

  • Termination: The deal may be terminated if regulatory approvals are not obtained by June 13, 2020, or if member approval is not obtained.
  • Client Objections: Funds may object to the transaction; assets of objecting funds may be excluded from the revenue run-rate calculation.
  • Forward-Looking Statements: Actual results may differ materially due to market conditions, regulatory outcomes, and integration risks.

Investor Verification Checklist

  • Verify the final election ratio between cash and Brookfield shares once the proration is calculated.
  • Monitor the status of regulatory approvals, specifically CFIUS and antitrust reviews.
  • Review the definitive consent solicitation statement/prospectus (Form F-4) for detailed risk factors and financial projections.
  • Confirm the specific valuation of OCGH units for future exchange rights, noting the reliance on trailing earnings multiples.
  • Check for any updates regarding the $225 million termination fee obligations and the Reimbursement Agreement involving Howard Marks and Bruce Karsh.