The fund industry is about to undergo more consolidation with a merger between Franklin Resources and Legg Mason.
Fund company Franklin Resources (ticker: BEN) said Tuesday morning that it had struck a deal to buy Legg Mason (LM), valuing the company at $50 per share, sending shares of both companies higher. That would be a 23% premium to Legg’s closing price of $40.72 on Friday.
The all-cash deal values Legg at $4.5 billion. Franklin will also assume $2 billion of Legg’s debt. Franklin stock rose more than 7% in recent trading, while Legg shares soared more than 23% in morning trading.
Franklin said the deal is expected to lift earnings per share by more than 20 percentage points above consensus estimates for fiscal 2021, excluding one-time charges. Franklin also said it expects to realize $500 million in tax benefits from the transaction, including net operating losses, foreign tax credit, and goodwill amortization from Legg.
“This transaction is playing offense,” said Jenny Johnson, president and CEO of Franklin on a call with analysts Tuesday morning. She said that it was about adding an “all-weather product lineup,” more capabilities in fixed income, real estate, and alternatives. The deal also combines distribution platforms globally for the two companies, giving them more scale in retail and institutional sales, along with a bigger combined international presence in markets such as Japan, Australia, and the United Kingdom.
“Having the all-weather platform—to always have something to sell—is incredibly important,” she said.
Consolidation is sweeping the brokerage and fund industries. Charles Schwab (SCHW) and TD Ameritrade (AMGD) have announced a merger. Fund companies have been merging too, including a deal that created Janus Henderson Group (JHG), and a merger between Standard Life with Aberdeen Asset Management.
Based in Baltimore, Legg had $804 billion in assets under management at the end of 2019. Combined with Franklin’s $717 billion, the company would top $1.5 trillion in assets under management, making it one of the largest mutual fund and asset managers in the U.S.
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The combined company's assets under management would top those of T. Rowe Price (TROW) at $1.2 trillion, making Franklin/Legg one of the largest active managers. Vanguard and BlackRock (BLK) report more than $5 trillion in assets under management, but they are largely in passive investment vehicles such as index mutual funds and exchange-traded funds. Fidelity reports $2.1 trillion in mutual fund assets under management, including $976 billion in equity funds and $243 billion in fixed income.
Credit Suisse analyst Craig Siegenthaler sounded positive on the merger. Franklin “can afford the purchase given its net capital position and debt capacity,” he wrote in a brief note Tuesday morning. Additionally, Legg would provide Franklin with “strong capabilities” in credit and alternatives that would help Franklin “fill in major product gaps.”
Barron’s recommended Franklin’s stock last October, arguing Franklin had a cash-rich balance sheet and cheap share price. The company had $8.5 billion of cash and investments as of Sept. 30. That currently amounts to more than half its market value of $12.1 billion. The company says it will have $5.3 billion of cash and investments after the deal closes.
Franklin and Legg have been struggling with outflows from their actively managed mutual funds, which have been pervasive throughout the fund industry. Both companies have been cutting costs. Franklin says it expects to reap $200 million in annual cost savings from the merger, with most of the savings realized within a year after the transaction closes.
Legg is more diversified: It has an affiliated structure with other boutique asset managers, owning stakes in nine firms that manage funds under their own brands, including fixed income manager Western Asset Management, small-cap fund manager Royce Funds, and income manager ClearBridge Investments.
How those managers fit into the Franklin corporate culture and management remains to be seen. There’s the potential for asset losses that can occur around mergers. Franklin said it would maintain the independence of its affiliated managers and expects asset attrition rates to be low.
The CEOs of Western Asset and ClearBridge both said in a statement that they support the deal. ‘
Legg’s buyout wasn’t all that unexpected. Activist investor Nelson Peltz of Trian Partners had been buying the stock and took a seat on Legg’s board last May. Peltz had been involved in Legg from 2009 to 2014, helping fuel a more than 75% gain in the stock. It floundered after he left and got a pop when he returned to the company again last year.
Trian and Peltz own 4 million shares or 4.5% of the outstanding stock of Legg. Peltz said in a statement that he supports the deal. “Given the dynamics of today’s rapidly evolving and increasingly competitive asset management sector, I believe this transaction is compelling,” he said.
Write to Daren Fonda at daren.fonda@barrons.com
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Franklin Resources Is Buying Legg Mason for $4.5 Billion - Barron's
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