Franklin Resources, Inc., one of the largest asset managers, announced today that it will acquire a majority stake in K2 Advisors, a $9.3B in AUM independent fund of hedge funds, from TA Associates for $183M. Per the press release, K2 has a global presence with offices in the U.S., U.K., Japan, Australia, and HK and an 18 year track record of strong growth and performance. The transaction is expected to close in C4Q12 while also providing a path for BEN to ultimately acquire 100% ownership beginning in 2016. Deal will be funded using a partial amount of cash proceeds from the announced debt offering on 9/19.
Franklin Resources, Inc. (NYSE:BEN) also filed this morning a registration to issue debt. Franklin Resources, Inc. (NYSE:BEN) is targeting $500M, with the proceeds going towards the K2 acquisition and the remainder towards retiring $300M that comes due next summer. Debt rates are currently very attractive with a number of firms looking to retire existing obligations.
Several strategic positives — First, the deal further diversifies the platform into alternatives and the institutional channel, including 30+ strategic partnership relationships. Second, it aligns Franklin Resources, Inc. (NYSE:BEN) with the fast(er) growing alternatives segment and adds another avenue for flow growth by positioning BEN to benefit from rising alternatives allocations. Third, it should further bolster client relationships given K2’s risk management, multi-asset, and solutions capabilities. Fourth, the deal appears accretive to EPS. Fifth, K2 management appears engaged to grow the business as the founding MD’s entered into long-term employment agreements and management did not sell any interests upfront.
While financial details are limited beyond the $183M purchase price, Citigroup research estimates that the deal adds approximately $0.04 to annual EPS, or about 0.4% accretion to our current F13 EPS estimate of $10.05. Their analysis assumes 60% ownership, 65 bps fee rate, 50% margin, 2% financing, and 30% tax rate. They also assume 15% of the purchase price is allocated to intangibles with a 10-year life.
Morgan Stanley research notes; that they view Franklin Resources, Inc. (NYSE:BEN) ’s purchase of a majority stake in K2 as a small but strategic step towards expanding its alternatives platform. Despite a relatively small deal ($183mm paid for majority stake) and minimal EPS contribution (est 1-2% potential accretion after full purchase), we view this as an important step in broadening an alternatives platform that has lagged some peers. K2 is the 7th largest HFoF provider, one of a select few to grow AuM during the financial crisis, and we believe that gaining access to Franklin’s distribution platform should provide strong opportunities for future capture of institutional allocations.
Franklin Templeton currently has $731 billion of assets under management. Natixis, Goldman Sachs (GS) and Legg Mason have AUM of around $700-$850 billion.
(Disclosure: No position in any securities mentioned).