Bank of Montreal agreed to buy F&C Asset Management Plc, the manager of the oldest U.K. investment fund, for 708 million pounds ($1.2 billion) in the second-largest takeover in its 196-year history.
Canada’s fourth-largest lender by assets will pay 120 pence a share in cash, the firms said today in a joint statement. F&C shareholders will also receive their 2 pence dividend for 2013.
F&C “is intended to form the centerpiece of BMO Global Asset Management’s European operations,” the companies said. Bank of Montreal, like other Canadian lenders, is expanding its money-management arm abroad amid a slowdown in domestic consumer lending. It’s acquiring a London-based firm whose assets shrank last year as institutional clients pulled funds.
“This transaction is a good strategic fit and financial fit,” Bank of Montreal Chief Executive Officer William Downe, 61, said today in a conference call with investors. “It supports the accelerating expansion of our wealth business, and it further strengthens our competitive position in the market.”
F&C rose 6.1 percent to 124 pence at the close of trading in London. The shares surged 25 percent yesterday, when F&C said it was in talks with the Toronto-based bank and was likely to recommend a bid. Bank of Montreal rose 0.1 percent to C$70.54 at 4 p.m. in Toronto.
The price “represents an attractive valuation from the standpoint of the Canadian bank,” said David Cumming, global head of equities at Standard Life Investments, which holds a 10 percent stake in F&C. “Consequently, we intend to keep our options open should another suitor for F&C emerge.”
Bank of Montreal’s offer may flush out other bidders, Arun Melmane, a Canaccord Genuity analyst, said today in a note to clients. The deal is expected to be completed after May 1, the bank said.
“The length of time needed for regulatory approval could bring other potential bidders into the arena,” Melmane said. He called the all-cash offer “in the ballpark of the intrinsic value of F&C.”
F&C, which earns more than 90 percent of its revenue in mainland Europe and the U.K., said separately today that its assets under management shrank 9 percent to 82.1 billion pounds at the end of December from 90.1 billion pounds as of Sept. 30. The decline was due to the withdrawal of more than 10 billion pounds by Dutch insurer Achmea BV, which was announced in May.
“F&C has had its challenges with declining assets under management and elevated expenses,” Robert Sedran, an analyst with Canadian Imperial Bank of Commerce, said in a note to clients. Bank of Montreal is “making the bet that it has reached an inflection point on both issues.”
Activist investor Edward Bramson stepped down as F&C’s chairman five months ago, and his Sherborne Investors LLC sold about 19 percent of the outstanding stock in November, data compiled by Bloomberg show. He had sought to boost the fund manager’s performance by cutting costs and focusing on traditional business areas such as investment trusts and managing fixed-income assets for insurers.
Adding F&C will lift the assets being overseen to about $269 billion for the lender’s BMO Global Asset Management business, according to a presentation. The F&C assets will increase Bank of Montreal’s fixed-income weightings to 42 percent of the combined portfolio from 34 percent. European clients, who represented 4 percent of Bank of Montreal’s wealth customers, will account for more than half under the combined platform.
“Adding a larger fixed income and a European component really helps to round out what is a broad global offering,” Downe said in the call.
F&C takes its name from the 146-year-old Foreign & Colonial fund that began in 1868. Bank of Montreal was founded by Scottish, American and French-Canadian merchants and fur traders in 1817.
Bank of Montreal bought London-based Pyrford International Plc in 2007 for C$41 million ($37 million). Four years later, it purchased Hong Kong-based Lloyd George Management, which had an office in the U.K., and introduced its BMO Global Asset Management brand. The lender expanded its U.S. wealth management platform with its biggest takeover, the C$4.1 billion purchase of Milwaukee-based consumer bank Marshall & Ilsley Corp. in July 2011.
Bank of Montreal earned C$574 million profit from its wealth business last year, or 14 percent of the lender’s overall net income, according to financial statements. About 96 percent of the bank’s overall profit comes from Canada and the U.S., statements show.
The F&C deal will “modestly” add to earnings in the first year and provide an internal rate of return of 15 percent, Bank of Montreal said.