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Franklin (BEN) Concludes Acquisition of Legg Mason for $4.5B

Recently, Franklin Resources BEN, operating as Franklin Templeton, completed the acquisition of Legg Mason, Inc. and its specialist investment managers. The deal was announced earlier this February for $4.5 billion.

The combined entity, creating a strong separately-managed account business, aims to grab 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 its market share.

Franklin entered into an all-cash acquisition deal with Legg Mason, per which the former acquired 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 also acquired Legg Mason’s outstanding debt worth $2 billion and assets under management (AUM) of $763 billion as of Apr 30, 2020. The deal has made Franklin to be listed as one of the world’s largest independent, specialized global investment managers, with an AUM of $1.4 trillion in the investment management industry.

“We’re extremely excited to announce the close of our Legg Mason acquisition, representing the largest and most significant transaction in Franklin Templeton’s history,” said Jenny Johnson, president and CEO of Franklin Templeton. “A tremendous amount has happened since we made our announcement in mid-February, but the strategic rationale for this powerful combination has only strengthened. This acquisition unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies. Our combined firm is aligned in terms of culture and our shared focus on delivering strong investment results for our valued clients,” Johnson added.

Strategically, the combined entity will enhance through advanced technologies, innovative products and create a competitive edge with financial stability. Remarkably, 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 shall be retained as the executive chairman of the Franklin Resources board. Furthermore, senior management teams of Legg Mason’s investment affiliates will remain unchanged.

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. Notably, annual cost 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.

Moody’s Ratings

Following the completion of the merger deal, Moody's Investors Service, the rating services arm of Moody's Corporation MCO, reiterated Franklin’s A2 senior unsecured debt rating. Additionally, Legg Mason's senior unsecured and junior subordinate debt ratings were upgraded one notch to A3 and Baa1, respectively. Therefore, the review of Legg Mason's debt ratings initiated in February 2020 when the transaction was announced was concluded.

Notably, Legg Mason's legacy debts are outstanding and treated as obligations of the merger subsidiary but Franklin will not be the guarantor.

Bottom Line

In the current scenario, firms are moving toward consolidation to dodge the heightened costs of regulatory compliances and increased investments in technology, in a bid to be competitive. Further, the coronavirus pandemic and its impact on business have escalated the concerns for survival. 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 have rallied 19.6% in the last three months, as compared with 18.8% growth recorded by the industry.

Currently, Franklin flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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AllianceBernstein Holding L.P.'s AB earnings estimate for the current year moved 10.6% north over the past 30 days. Over the past three months, this Zacks #2 Ranked company’s shares have gained 26.8%.

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