Brighthouse Preferreds: A Value Investor's View on the Acquisition's Impact

The factual basis of the deal is clear. In November, Aquarian Capital announced it will acquire Brighthouse Financial in an all-cash transaction valued at approximately $4.1 billion. The price is set at $70 per share, representing a roughly 35% premium over Brighthouse's closing price before the announcement. The deal, expected to close in 2026, will see Brighthouse operate as a standalone entity within the Aquarian Capital portfolio.

Aquarian's stated purpose is strategic. The firm, which has grown through a string of insurance acquisitions since its founding in 2017, sees this as a move to expand its insurance platform and gain a foothold in the U.S. retirement market. Its founder, Rudy Sahay, explicitly cited the strategic focus on the U.S. retirement market as a key driver. This aligns with a broader trend of private equity firms acquiring life insurers for their stable capital and investment management capabilities.

The plan for Brighthouse itself is one of preservation and investment. Aquarian intends to preserve Brighthouse Financial's disciplined and thoughtful approach to distribution, products and services while accelerating its strategy through continued investment and customer focus. Eric Steigerwalt will remain CEO, and the company will keep its name, brand, and headquarters in Charlotte. More specifically,

Aquarian Investments, its investment management platform, plans to bolster Brighthouse Financial's investment management capabilities.

This setup is critical for understanding the preferred stock's value proposition. The acquisition is not a breakup or a radical restructuring. It is a platform play. By acquiring a leading annuity and life insurance provider, Aquarian aims to build a more comprehensive retirement solutions business. Brighthouse's existing strengths-its leadership in variable annuities and its partnership with BlackRock on in-plan income products-provide the foundation for this expansion. The core value here is the potential to compound within a larger, more integrated ecosystem, rather than the immediate financials of the standalone entity.

The Preferred Shareholder's Structural Disadvantages

For the value investor, the preferred stock's setup presents a classic case of asymmetric risk. The core proposition is one of deep value, but it is built on a foundation of structural disadvantages that the acquisition has only intensified.

The most glaring feature is the steep discount to liquidation preference. The Series A preferred (BHFAP) trades at $16.07 per share, a 35.72% discount to its $25 face value. The Series B (BHFAO) is not far behind, with a recent price around $16.35. This discount is not a market mispricing of the underlying business; it is a direct reflection of the security's inherent risks. The discount widens the margin of safety on paper, but it also signals the market's assessment of the preferred's vulnerability.

That vulnerability is defined by two key contractual terms. First, dividends are non-cumulative. This means the board can skip a payment without defaulting, and any missed dividend is simply lost. Second, and more critically, dividends are paid only when, as and if declared by the board. This places the preferred holder at the bottom of the capital stack, with no guarantee of income, even if the company is profitable.

The acquisition has turned these theoretical risks into immediate, tangible pressure. The deal is a take-private transaction, and a primary consequence for public shareholders is the threat of delisting. As the company prepares to exit the public markets, its preferred stocks have been "hammered" by this fear. The discount to par is the market pricing in the likelihood of these securities being removed from major exchanges, making them less liquid and harder to value. This is not a temporary volatility; it is a fundamental change in the security's character.

The evidence shows this is already happening. Major ETFs that hold these preferreds have been trimming positions. The Invesco Preferred ETF (PGX) and the Global X U.S. Preferred ETF (PFFD) have each reduced their holdings by over 5% in recent filings. This institutional selling is a clear vote of confidence in the delisting risk. For a value investor, the deep discount offers a potential entry point, but it is a discount earned through a loss of liquidity and a heightened risk of dividend suspension. The acquisition has not created value for the preferred holder; it has exposed the securities' structural frailties.

Valuation, Scenarios, and What to Watch

The path ahead for Brighthouse's preferred shares is defined by a clear timeline and a set of binary outcomes. The deal is expected to close in 2026, pending the usual hurdles of shareholder and regulatory approvals. Until that closing date, the securities will trade on the uncertainty of what happens next. The average analyst price target for the Series B preferred (BHFAO) is $16.90, a modest premium to its recent price of $16.35. This consensus view suggests a market that sees the deep discount as a temporary artifact of the acquisition process, not a permanent valuation.

The key catalyst is the closing itself. For the preferred holder, the event will likely trigger a final settlement. The terms of this settlement are the critical unknown. Will Aquarian Capital offer a cash payment to preferred shareholders? If so, at what price relative to the $25 liquidation preference? A settlement that offers a meaningful recovery above the current trading price would be the best-case scenario, effectively closing the discount. However, the market's institutional selling-seen in ETFs like PGX and PFFD trimming holdings-suggests many believe the likely settlement will be minimal or that the securities will simply be delisted with no cash consideration.

Viewed another way, the preferred's fate is a function of the company's capital structure post-acquisition. Aquarian's plan is to operate Brighthouse as a standalone entity within its portfolio. This means the preferreds are not being retired; they are being absorbed into a private holding company. The board of the new private entity will have full discretion over dividend declarations, a power that remains unchanged. The structural disadvantages-non-cumulative dividends and no guarantee of payment-persist. The acquisition does not alter the security's place at the bottom of the capital stack.

For the value investor, the watchlist is straightforward. First, monitor the timeline for closing. Any delay could prolong the uncertainty and keep the discount wide. Second, watch for any official communication from Aquarian regarding the treatment of preferred shareholders. Silence may be interpreted as a lack of plan, which is a negative signal. Third, observe the price action of the preferreds themselves. A steady climb toward the $16.90 average target would indicate growing confidence in a favorable settlement. A continued slide would signal that the market is pricing in a delisting with little or no cash recovery.

The bottom line is that the preferred stock offers a deep value proposition only if the settlement is generous. The acquisition has not created new value; it has crystallized the risks. The security's price is a bet on the final terms, not on the underlying business's future growth. Until those terms are known, the discount to par will remain a reflection of that uncertainty.