A year ago, Rithm Capital (RITM) changed its name to reflect a broader business scope. Formerly known as New Residential Investments, the company is expanding beyond mortgage-related services and investments.

Last week, Rithm announced the acquisition of Sculptor Capital Management (SCU) for $639 million, or $11.15 per share.

Let’s take a look at what Rithm Capital will be buying – and how it affects us investors…

I always pay attention whenever big dividend payers, such as Rithm Capital, make big moves. But in this case, I’m particularly interested, as New Residential Investments/Rithm Capital has been a recommended stock in my Dividend Hunter service since August 2014.

Sculptor Capital is an alternate asset management company, with $34 billion of assets under management. The company’s website gives this description of its investment strategy:

“Sculptor’s multi-strategy platform invests in high-conviction investment ideas across asset classes, regions and investment strategies. Our primary focus is on idiosyncratic opportunities where return drivers are less sensitive to market direction and which tend to arise when value is obscured by attributes such as complexity, corporate actions, market dislocations, or investor misunderstandings. Additionally, we have the flexibility to take on market-directional risk when we believe that broad market dislocations have created asymmetric upside/downside potential.”

As Rithm Capital explained in its press release:

Strategic Rationale

• Significantly expands Rithm’s capabilities in the alternative asset management sector:
  • $34 billion of AUM diversified across the real estate, credit and multi-strategy investing spectrum
  • Creates instant scale and broadens Rithm’s product offerings and investment management capabilities
• Combination of complementary platforms creates a compelling partner for investors:
  • Rithm and Sculptor benefit from complementary capabilities, significantly enhancing the transaction potential and benefit to shareholders, fund investors and employees
  • Adds a long-tenured management and investment team to the Rithm platform with a strong track record
• Potential to unlock significant opportunities to grow Sculptor:
  • Provides capital to accelerate growth across sectors
  • Ability to augment existing Sculptor business by seeding new funds and strategies and leveraging existing infrastructure to launch complementary funds
• Attractive transaction for Rithm and Sculptor shareholders:
  • Represents a premium of 18% over the closing price of Sculptor’s Class A shares on July 21, 2023 and a premium of 31% over the unaffected November 17, 2022 closing Class A share price of $8.50.
  • Expected to be neutral to Rithm’s 2024 earnings and accretive in 2025

What I found interesting is that in October 2021, before the 2022 bear market, SCU traded for around $28 per share. The bear market drove the share price down to the high single-digits, where it has traded since June 2022.

The Sculptor Capital earnings record shows highly variable results, ranging from $6.10 per share for the 2020 fourth quarter, to a loss of $0.94 for the 2021 fourth quarter. To even out the results, I averaged the quarterly earnings after that big 2020 Q4 result through the first quarter of 2023. Earnings averaged $0.32 per quarter, which annualizes to $1.28 per year.

Rithm Capital will pay less than ten times normalized earnings for Sculptor Capital. Plus, Rithm gets the benefit that Sculptor can, at times, generate monstrous quarterly earnings.

Rithm Capital wants to broaden its services, diversifying away from the mortgage business. It looks like the Sculptor purchase will be a great next move.