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Franklin (BEN) to Acquire Legg Mason (LM) for $4.5 Billion

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Franklin Resources BEN, operating as Franklin Templeton, recently entered into an all-cash acquisition deal with Baltimore, MD-based Legg Mason , per which the former will acquire the latter for $50.00 per share of common stock. The combined entity will operate under the name of Franklin Templeton, headquartered in San Mateo.

Notably, San Mateo, CA-based Franklin will also acquire Legg Mason’s outstanding debt worth $2 billion and assets under management (AUM) of $806 billion as of Jan 31, 2020. The deal, approved by the boards of both companies, on completion will be listed as one of the world’s largest independent, specialized global investment managers, with AUM of $1.5 trillion in the investment management industry.

The combined entity, creating a strong separately-managed account business, aims to grab the market opportunities and scale the client base higher, striking a balance between institutional and retail client AUM. Moreover, the companies’ expanded scale, technological advancement and increased product offerings will help capitalize the market share.

However, the deal awaits certain regulatory approvals and customary approvals by shareholders of Legg Mason. Further, the transaction is anticipated to close in the third calendar quarter of 2020.

"This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies," said Greg Johnson, executive chairman of Franklin Resources’ board. "Our complementary strengths will enhance our strategic positioning and long-term growth potential, while also delivering on our goal of creating a more balanced and diversified organization that is competitively positioned to serve more clients in more places," Johnson further noted.

Terms of the Deal

Per terms of the deal, Franklin’s existing balance-sheet cash will fund the all-cash consideration of $4.5 billion. On its closure, pro forma gross debt of $2.7 billion, and remaining cash and investments of $5.3 billion is expected by Franklin Templeton on the balance sheet.

Strategically, the combined entity will enhance through advanced technologies, innovative products and create a competitive edge with financial stability. Notably, on acquisition, investment philosophies, processes and brands of Legg Mason’s affiliates will be kept intact by Franklin Templeton.

Jenny Johnson will continue to serve as the president and CEO of the combined entity, while Greg Johnson will be retained as the executive chairman of the Franklin Resources board. Furthermore, senior management teams of Legg Mason’s investment affiliates will be intact.

EnTrust Global, a Legg Mason affiliate serving with alternative investment solutions, and Franklin Templeton have mutually agreed on repurchase of its business by EnTrust, which will likely be acquired by management on the deal’s closure. Jenny Johnson added, "EnTrust is an excellent business and we recognize and appreciate their desire to once again become a private company. We have appreciated their collaboration in our discussions and look forward to our ongoing relationship."

Financial Benefits

The above-mentioned acquisition is likely to generate upper twenties percentage GAAP EPS accretion in fiscal 2021 (based on street consensus earnings estimates for each company), excluding one-time charges, non-recurring and acquisition associated expenses.

The parent company-rationalization and global-distribution optimization are anticipated to inculcate cost synergies. Therefore, annual cost savings worth $200 million is projected. Notably, these savings would be net of growth expected in the combined business, along with Legg Mason’s previously-announced cost savings.

Within a year, post-closing, most savings will likely be recorded with the remaining synergies to be realized over the next one to two years.

Broadhaven Capital Partners, LLC and Morgan Stanley & Co LLC, a unit of Morgan Stanley MS acted as financial advisors for Franklin, while PJT Partners and J.P. Morgan Securities LLC, a unit of JPMorgan JPM acted as financial advisors for Legg Mason.

Bottom Line

In the current scenario, firms are moving toward consolidation to dodge the heightened costs of regulatory compliance and increased investments in technology, in a bid to be competitive. Moreover, the current rise in passive, low-cost index funds has taken a toll on asset managers, eroding overall profitability.

Therefore, such moves have caused investors to become optimistic about banks’ growth prospects. Shares of Franklin and Legg Mason have rallied 0.3% and 41.1%, respectively, year to date, as compared with 8.3% growth recorded by the industry.

Currently, Franklin carries a Zacks Rank #3 (Hold), while Legg Mason sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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