Man to acquire FRM
Man Group plc ("Man") has agreed to acquire the entire issued share capital of FRM Holdings Limited (Financial Risk Management "FRM"), a global hedge fund research and investment specialist with funds under management of approximately $8.0 billion1 (the "Acquisition"). Man will integrate FRM with its multi- manager business and, through combined resources and scale, will aim to offer clients deeper and more diverse capabilities, increasingly compelling products and services and better investment performance.
1 Source: FRM estimates based on latest information available prior to the date of this announcement.
No consideration will be paid up front, with contingent consideration dependent on asset retention.
The Acquisition will involve a scheme of arrangement under Jersey law and is also subject to the satisfaction or waiver of customary conditions (including receipt of regulatory approvals including from the FSA). It is expected to be completed before the end of Q3 2012.
- Man and FRM's combined multi-manager business will have total funds under management of approximately $19 billion, making it the largest independent non-US based fund of hedge funds. The scale of its combined investment resources plus the sophistication and accelerated growth of Man's managed accounts platform will benefit investors in the flagship funds of both entities. With additional scale and resources, the combination has the potential to attract assets and deliver strong returns to investors.
- No consideration will be paid up front. The contingent consideration to be paid over three years comprises i) a maximum of $82.8 million in cash, net of total net assets acquired (subject to post-closing balance sheet adjustments) and dependent on asset retention ii) a 47.5% share of performance fees attributable to FRM's existing funds under management over three years, subject to a cap.
- Upon completion, the combined business will trade under the FRM brand and will be led by Luke Ellis, Chief Executive of Man Multi-Manager and previously Managing Director of FRM. Luke's knowledge of both businesses will accelerate integration and ensure continuity for fund investors. Blaine Tomlinson, founder of FRM, will become non-executive Chairman of the combined business.
- Sumitomo Mitsui Trust Bank Limited (SMTB) which advises a significant portion of FRM's investors, has endorsed the acquisition by agreeing a new ten year Strategic Relationship Agreement with Man. SMTB will also exchange its current shareholding in FRM for a minority holding of preference shares in RBH Holdings (Jersey) Limited, a Man subsidiary.
- Cost savings of $45 million per annum from operational synergies in the combined group are expected to generate double digit accretion to Man's adjusted management fee EPS in 2013. The internal rate of return from the Acquisition is expected to be well in excess of Man's cost of capital.
Peter Clarke, Chief Executive of Man, said: "This financially compelling transaction provides us with the opportunity to significantly improve the profitability of our multi-manager business. By combining the complementary investor bases of the two businesses and pairing FRM's well regarded investment process with Man's managed accounts infrastructure, we can increase revenues with no material change to Man's current cost base. The transaction has been structured so that the consideration adjusts in line with asset retention, to ensure an attractive return for our shareholders.
"Luke Ellis's previous role as Managing Director of FRM will assist rapid and efficient integration and delivery of the benefits of the combination to investors, globally. We are delighted to be further strengthening our relationship with Sumitomo Mitsui Trust Bank through a long-term strategic partnership in Japan."
Luke Ellis, Chief Executive of Man Multi-Manager, said: "We see this Acquisition as a big step forward for both businesses. Our shared DNA, particularly across the investment process, will help us integrate rapidly and remain focussed on delivering strong returns for our investors. Institutional hedge fund investments continue to grow, and assets are concentrating with a limited number of scale winners. The combined business will have the scale, resources and expertise to succeed in this competitive environment."
Blaine Tomlinson, Chief Executive of FRM, said: "Over the past two decades, we have built FRM from its origins as a private family office and hedge fund research consultancy into a powerful institutionally focussed fund of hedge funds provider. Thanks to my long partnership with Luke, the combination with Man is a unique opportunity to move our business forward without the usual level of integration risk for our investors. Our investors will benefit from combined resources, including Man's substantial investment in managed accounts and sophisticated analytics, knowing that the robust investment philosophy that underpinned their allocations to FRM will remain at the heart of the integrated business."
Mr Ohtsuka, Deputy President of SMTB, said: "We have known FRM and Man well for many years and are delighted to extend our strategic relationship agreement with the combined business. FRM has been an important part of our asset allocation since 2005 and we look forward to providing our investors with the significant additional benefits available through the combination."
There will be a conference call for journalists at 07:45 UK time this morning, followed by a call for investors and analysts at 08:15 UK time. Dial in details can be found at the end of this document.
Benefits to fund investors and integration plans
The integration of Man Multi-Manager (funds under management of $10.9 billion2) with FRM (funds under management of approximately $8.0 billion3) is expected to create the following benefits for fund investors.
- A strong brand of commingled fund of hedge funds and sophisticated institutional hedge fund solutions based on research strength, direct managed accounts investments, risk and advisory services and manager seeding activities.
- Increased resources and infrastructure under a stable and financially independent corporate parent, with skilled professionals following a consistent investment process enhanced by the proprietary analytics available on Man's managed accounts platform.
- One of the most significant hedge fund research and risk management teams in the industry, able to harness the benefits of scale to deliver better returns to investors net of costs, through superior operating efficiency and increased bargaining power with an enhanced range of underlying managers and service providers.
2 Source: Man Group plc Interim Management Statement dated 1 May 2012
3 Source: FRM estimates based on latest information available prior to the date of this announcement.
SMTB, which advises a significant portion of FRM's asset base and owns 4.95% of FRM, will continue to be a key partner for the integrated business and has endorsed the combination by agreeing to a ten year extension of FRM's existing Strategic Relationship Agreement with effect from completion of the Acquisition. SMTB will also exchange its current shareholding in FRM for a holding of preference shares in RBH Holdings (Jersey) Limited, the Man subsidiary which will acquire FRM. This shareholding will entitle SMTB to a dividend corresponding to a 2.65% per annum share of the net management and performance fee revenues generated from the acquired FRM funds under management.
Luke Ellis, Chief Executive of Man Multi-Manager, will lead the combined business and be Chief Investment Officer. Having served in the senior management of FRM from 1998 to 2008, Luke's knowledge of FRM will accelerate the integration and ensure continuity for investors. Blaine Tomlinson, founder of FRM, will become non-executive Chairman of the combined operation. Upon completion, the combined business will trade under the FRM brand.
Acquisition structure and financial considerations
The contingent consideration payable to FRM shareholders (other than SMTB) in connection with the Acquisition comprises
- Two earn out payments, payable in cash following the first and third anniversaries of closing, on a sliding scale dependent on levels of run rate net management fees
o After one year, up to $47.5 million
o After three years, up to $66.5 million
- 47.5% of net performance fees generated from FRM's existing assets in the three years after closing, capped at $60.8 million.
Man will pay an estimated $71.7 million in cash for an anticipated $102.9 million of net assets, principally cash, representing a discount to book value of approximately $31.2 million, subject to completion balance sheet adjustments.
The regulatory capital requirement associated with the Acquisition is expected to be approximately $90 million. The Acquisition will be accounted for as a purchase and consideration for the Acquisition will be satisfied from Man's available cash resources.
Given the diverse nature of FRM's shareholder base, the Acquisition will involve a scheme of arrangement under Jersey law and will be subject to approval by FRM shareholders in general meeting and by the Jersey Court. Irrevocable undertakings to vote in favour of approving the Acquisition and implementing the scheme have been obtained from FRM shareholders holding an aggregate of 97% of FRM's issued share capital (excluding shares held by SMTB). In addition, the scheme will require approval by SMTB.
The Acquisition is also subject to the satisfaction or waiver of customary conditions to closing including receipt of regulatory approvals, notably from the Financial Services Authority (FSA) in the UK and from the Jersey and Guernsey Financial Services Commissions. It is expected that the Acquisition will complete before the end of Q3 2012. The Acquisition is also subject to customary termination provisions. Unless Man and FRM agree to extend, the relevant time periods will terminate on 31 October 2012 if the conditions to closing have not been satisfied or waived on or by that date.
FRM is a global hedge fund research and investment specialist founded in 1991. As at 1 May 2012, FRM had approximately $8.0 billion under management4, with a predominantly institutional investor base including a substantial client presence in Asia. FRM's gross revenue margins are approximately 110 bps (90 bps net of distribution costs). Its revenues will be consolidated with Man's institutional fund of funds business. Annualised integration savings of $45 million related to people, property and technology are expected within 18 months of closing. Once achieved, the incremental run rate costs associated with FRM are expected to be approximately $30 million. Therefore, the acquisition is expected to be double digit accretive to Man's adjusted net management fee EPS in 2013. Restructuring and transaction costs, the majority of which will be accounted for in 2012, are expected to be approximately $35 million. Based on conservative assumptions and excluding any revenue synergies, the internal rate of return of the Acquisition is expected to be well in excess of Man's cost of capital.