Franklin Resources Inc. (BEN): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
Franklin's fiscal second-quarter 2014 earnings missed the Zacks Consensus Estimate and were below the prior-year quarter earnings as well. Results were impacted by higher expenses. However, improved top line, a healthy capital position and increased level of assets under management (AUM) were the positives. We believe Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its acquisitions in the last couple of years, efficient capital deployment activities and a strong balance sheet. However, regulatory restrictions and a sluggish economic recovery could mar AUM growth and increase costs.

Overview:

Franklin Resources Inc. (BEN), headquartered in San Mateo, CA, is a global investment management company. The majority of its operating revenue and net income is derived from investment advisory and related services to retail mutual funds, institutional and private accounts and other investment products. Related services include transfer agency, fund administration, custodial, trustee and fiduciary services. The mutual funds and other products are sold to the public under seven brands: Franklin Templeton, Mutual Series, Bissett, Fiduciary Trust, Darby, Balanced Equity Management and K2.

Franklin's principal line of business provides investment advisory and management services. Fund shares are offered to individual investors, qualified groups, trustees, tax-deferred (such as IRA) or money purchase plans, employee benefit and profit-sharing plans, trust companies, bank trust departments and institutional investors.

Effective Jul 1, 2012, Franklin has 1 operating segment - Investment management and related services. Previously, a secondary operating segment - banking/finance existed, which offered select retail banking, private banking and consumer lending services. During the fiscal year ended Sep 30, 2012, the company significantly reduced these services and now offers only select private banking services to investment management clients.

Apart from the domestic market, Franklin's global presence includes Europe, Middle East, Africa, Asia-Pacific, Canada and Latin America. As of Mar 31, 2014, Franklin had around 9,000 employees and operated offices in 35 countries with $886.9 billion in AUM.

In Jun 2013, Franklin completed the purchase of the remaining 80% stake in Pelagos Capital Management, LLC, an independent investment advisor. Franklin had previously purchased 20% stake in Pelagos in 2010.

On Nov 1, 2012, Franklin acquired approximately 69% of the equity of K2 Advisors Holdings LLC, a fund of hedge funds solutions provider. The purchase consideration included a $182.9 million cash investment in K2, which was primarily used to retire $176.5 million of debt immediately following the acquisition. The company also agreed to acquire K2's remaining equity interests over a multi-year period beginning fiscal year 2017, resulting in the conversion of this equity to a liability. The amount of the liability is contingent on K2's future revenue and profits and had an estimated fair value of $96.8 million as of Jun 30, 2013. This amount is based on payments of $12.9 million in fiscal 2014-2015, $56.0 million in fiscal years 2016 2017 and $98.7 million thereafter.

In Jul 2011, Franklin acquired all the outstanding shares of Balanced Equity Management Pty. Limited (BEM) for a purchase consideration of $64.1 million in cash and common stock. BEM is a specialist Australian equity manager with approximately $10.9 billion in assets under management as of the acquisition date.

In Jan 2011, Franklin acquired all of the outstanding shares of Rensburg Fund Management Limited (Rensburg), a specialist UK equity manager, for a purchase consideration of $72.4 million in cash. The purchase price allocated $52.6 million to indefinite-lived intangible assets, $10.2 million to tangible net assets and $9.6 million to goodwill. The indefinite-lived intangible assets relate to management contracts. At acquisition date, Rensburg had approximately $1.5 billion in AUM relating to various UK unit trusts.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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