Legg Mason is to acquire USD 20 billion AUM Permal Group, one of the world’s largest funds of hedge funds managers, for a price capped at USD 1.386 bn.
The deal, to
Legg Mason is to acquire USD 20 billion AUM Permal Group, one of the world’s largest funds of hedge funds managers, for a price capped at USD 1.386 bn.
The deal, together with the simultaneous acquisition of most of Citigroup’s worldwide asset management business, will promote the Baltimore, Maryland-based investment firm Legg Mason into a major global asset manager of equity, fixed income and alternative investment products.
Upon completion of the transactions with Citigroup and Permal, Legg Mason’s assets under management will aggregate over USD 830 billion.
Legg Mason’s chairman and chief executive officer, Raymond A. (Chip) Mason, said, "As a result of these strategic initiatives, Legg Mason becomes a singularly focused, more profitable and certainly more influential organization within the global asset management community. We believe these transactions are in the best interests of our shareholders.”
Under the terms of the Permal transaction, Legg Mason, which previously did not offer alternative investments, will acquire an 80% interest in Permal from Sequana Capital (previously Worms & Cie) and Permal management at closing (the transaction is expected to close in the fourth calendar quarter of 2005) with the right to purchase the remaining 20% over the next four years.
The initial payment at closing is expected to be USD 800 million, subject to potential downward adjustment, of which up to USD 200 million may, at Legg Mason’s option, be in the form of Legg Mason common stock, and the remainder in cash.
The residual 20% interest in Permal, which will be in the form of Permal preferred shares, will be subject to puts to and calls by Legg Mason in years 2 and 4, with payments based on a formula depending upon Permal’s net revenues at the time, and subject to certain caps. The aggregate price for 100% of Permal is capped at USD 1.386 billion, with a USD 961 million floor.
Legg Mason may elect to deliver up to 25% of each of the future payments in the form of Legg Mason common stock.
Isaac Souede, Permal’s Chief Executive Officer, said: “Legg Mason is a very exciting development for Permal and opens up a new phase for our business, with additional opportunities in both the private client and institutional markets. Permal has had more than 30 successful years under Worms & Cie. (recently renamed Sequana Capital). We are pleased to have the opportunity to develop further as part of a top-tier asset management organization, with a sterling reputation and philosophy of investment excellence.”
Permal’s entire senior management team is expected to continue at the company under long-term employment agreements.
The acquisition of Permal adds a new market and attractive new business model to Legg Mason’s family of asset managers. Permal also further diversifies Legg Mason’s investment disciplines by adding expertise in managing multi-manager funds and alternative products.
Permal’s client base consists primarily of high net worth individuals and families domiciled outside the United States. Through its principal offices in New York and London, and additional offices in Boston, Singapore, Dubai, Nassau and Paris, the company serves clients throughout Asia, South America, Europe and the Middle East. Permal also expects to open an office in Hong Kong over the next 12-15 months.
Chip Mason commented, "Permal has established itself as a leading funds-of-hedge-funds manager outside the United States, and just this year has entered the United States. In its 30-year operating history, Permal has established a reputation for delivering the kind of consistent investment performance that has attracted investors to alternative investments: attractive returns with low volatility.
"Permal’s long history in the alternative asset space sets it apart from its peers, and its consistent performance has enabled it to build broad and deep distribution relationships with world-class, geographically diverse partners. The addition of Permal will further enhance and diversify our growing asset mix and offer our shareholders excellent growth potential."
Mason concluded, "Permal has a great business model and a very sophisticated management team, under the leadership of Isaac Souede. We are pleased that Permal’s entire team will be joining the Legg Mason family. And, as is the case with most of our larger asset management businesses, Permal will operate on a stand-alone basis, so we anticipate a very smooth and seamless transition to Legg Mason."
Strategic Benefits of the Transactions
The transactions together are expected to more than double Legg Mason’s assets under management, to over USD 830 billion, and will enable the firm to focus on devoting its full energies as a "pure-play" global asset manager.
Upon closing of these transactions:
• Legg Mason becomes the 5th largest money manager operating in the United States
• Legg Mason becomes the 5th largest manager of mutual funds in the United States
 Legg Mason’s equity fund platform gains, through the Citigroup Asset Management (CAM) transaction, a number of large-cap growth and large-cap core funds and well regarded managers to complement Legg Mason’s existing strength across value, blend and small-cap asset classes.
• Western Asset becomes the #1 pure manager of fixed income in the world, with approximately USD 490 billion of assets under management and broad capabilities in all major fixed income asset types and currencies.
• Through Permal, Legg Mason adds an established, high quality manager in the rapidly growing funds-of-hedge-funds arena and becomes one of the five largest funds-of hedge funds managers in the world.
• Legg Mason will also increase its appeal to high net worth investors as it becomes, with approximately USD 58 billion of CAM client assets, the #1 provider of Separately Managed Accounts (SMA), which is an attractive market segment.
• Legg Mason will have a global distribution agreement with Citigroup that expands Legg Mason’s retail and institutional distribution network to include 14,000 brokers and an expanded non-proprietary sales force. As a result of the transactions, Legg Mason will expand its "on the ground" asset management centers to Tokyo, Hong Kong, Australia, and Latin America in addition to the United States, the United Kingdom and Singapore.
Financial Benefits of the Transactions
Today, more than 70% of Legg Mason’s earnings come from its asset management business, which generates 56% of the firm’s revenues.
Following completion of the above transactions, 100% of the firm’s revenues and earnings will come from managing money.
Financial benefits of the transactions include:
• Each of the transactions is expected to create both GAAP accretion (subject to realizing certain cost savings in the case of CAM) and substantial cash earnings accretion in year
one.
• Legg Mason will continue to have a solid balance sheet and reasonable leverage, with total debt-to-EBITDA of approximately 1.5 times.
The CAM transaction is expected to close in the December 2005.
