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Tuesday, February 18, 2020

Franklin Buys an $806B-AUM Rival

Reported by Neil Anderson, Managing Editor

A publicly traded mutual fund giant is about to buy another in a $4.5-billion deal that would create a $1.5-trillion-AUM asset management giant.

Jennifer M. Johnson
Franklin Resources, Inc.
President, Chief Operating Officer
This morning, Jenny Johnson, CEO of Franklin Resources (dba Franklin Templeton [profile]), and Greg Johnson, executive chairman, confirm that the San Mateo, California-based fund firm has agreed to acquire Baltimore-based Legg Mason [profile] for $50 per share, plus an assumption of about $2 billion in debt.

The deal is expected to close in Q3, pending approval from regulators and from Legg's shareholders. (Both companies' boards have already approved.)

That $4.5-billion price tag translates into 0.56 percent of Legg's $806 billion in AUM, as of January 31. (Or, if you factor in the debt being assumed, that makes the cost to Franklin $6.5 billion, bump the price up to 0.81 percent of AUM.) The deal would also more than double Franklin's AUM ($688 billion, as of January 31).

Broadhaven Capital Partners, Morgan Stanley, and Ardea Partners advised Franklin on the deal, while PJT Partners and J.P. Morgan Securities advised Legg. In terms of legal counsel, Willkie Farr & Gallagher worked with Franklin, while Weil, Gotshal & Manges and Skadden Arps, Slate, Meagher & Flom worked with Legg.

Franklin isn't buying all of Legg. The team at one Legg affiliate, alts shop EnTrust Global, will buy back their shares and go private. Dechert provided legal counsel to EnTrust.

Legg has a multi-boutique model, with a number of affiliated investment management shops operating semi-autonomously (from an investment perspective) underneath the mothership. The Franklin team insists that Legg's boutiques will keep their autonomy and that senior management at the affiliates will not change.

"By preserving the autonomy of each investment organization, the combination of Legg Mason and Franklin Templeton will quickly leverage our collective strengths, while minimizing the risk of disruption," states Joe Sullivan, chairman and CEO of Legg. "Our clients will benefit from a shared vision, strong client-focused cultures, distinct investment capabilities and a broad distribution footprint in this powerful combination."

The deal comes a week after Jenny Johnson succeeded Greg Johnson as Franklin's chief. Once the deal closes, Jenny Johnson will continue to serve as the combined firm's president and CEO, and Greg Johnson will continue to serve as its executive chairman. There is no mention of what will happen to Legg's senior leadership team, including Sullivan.

The combined company will stick with the Franklin Templeton brand and with Franklin's San Mateo headquarters. The Franklin team expects to realize about $200 million in annual cost savings, "net of significant growth investments Franklin Templeton expects to make."

"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," Greg Johnson states.

"This acquisition will add differentiated capabilities to our existing investment strategies and modest overlap across multiple world-class affiliates, investment teams and distribution channels, bringing notable added leadership and strength in core fixed income, active equities and alternatives," Jenny Johnson states. "We will also expand our multi-asset solutions, a key growth area for the firm amid increasing client demand for comprehensive, outcome-oriented investment solutions."

John Davidson, lead independent director for Legg, calls the deal "the beginning of an exciting next chapter for Legg Mason." Nelson Peltz, a Legg director and CEO and founding partner of Trian Fund Management (which owns about 4.5 percent of Legg's stock), states that the deal "offers an attractive valuation." 

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