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BMO sees $1.3-billion UK acquisition as way to expand wealth management arm

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TORONTO - The Bank of Montreal (TSX:BMO) is making plans to double its wealth management business with an acquisition across the pond valued at $1.3 billion.

The Canadian bank made official Tuesday a friendly deal to buy U.K.-based F&C Asset Management PLC.

BMO Global Asset Management will roughly double its assets under management to US$269 billion with the addition of F&C.

In a conference call with analysts, BMO chief executive Bill Downe called the purchase a "logical" step for the bank, which has focused primarily on Canada and the U.S. Midwest.

"Adding a larger fixed income and European component really helps to round out what is a broad global offering," Downe said.

"I think it's going to be attractive to both our investor base in the United States and in Canada but... (also) in Asia, Europe and the Middle East."

F&C disclosed Monday that it was in advanced discussions with BMO about a deal, which still requires shareholder and other approvals. It is expected to close after May 1.

Downe said the timing was right, as the bank foresees further growth in the European market.

"We can see the emergence of possible economic growth in Europe sooner, perhaps than some had expected," he said.

"I don't think it's going to be rapid but I think this is an opportune time from a valuation perspective and hopefully, as we close (the deal) and integrate (F&C), we'll start to see some more economic momentum."

Bank of Montreal is offering 120 British pence, or about C$2.21 at current exchange rates, for each share of F&C — about 28 per cent above Friday's closing price.

F&C shares closed at 123.5 pence on the London Stock Exchange.

"F&C's board of directors believes the offer represents an attractive valuation for F&C shareholders and a positive outcome for employees and clients," F&C chairman Kieran Poynter said in a joint statement with BMO.

The bank expects only "modest" savings in making the acquisition since F&C has already done a lot to reduce costs in recent years.

In a note, CIBC World Markets analyst Robert Sedran said the acquisition should not come as much of a surprise and reflects a "continuation" of BMO's strategy to further focus on wealth management. In the past, it has acquired other firms including Pyrfod International and Lloyd George Management.

"The good news from the risk perspective is that the deal is hardly transformational and so the overall risk profile of the bank is little changed," he wrote.

Nevertheless, Sedran noted F&C has been dealing with higher costs and lower assets under management, two issues that BMO expects to have reached their "inflection point."

He said BMO is betting F&C can grow its retail and institutional investment arm as it deals with declining revenue from so-called legacy relationships.

The British firm reported that its assets fell in the fourth quarter to 82 billion pounds from approximately 90 billion pounds after one of its legacy investors pulled 10 billion pounds. Nearly 60 per cent of F&C's assets are from legacy relationships with four pension funds.

Meanwhile, Desjardins analyst Michael Goldberg called the deal as "modestly positive" for BMO.

Goldberg said the purchase could add an estimated 10 cents to BMO's annualized earnings per share, which Desjardins projects to be $6.50 for fiscal 2014.

"F&C has attractive distribution capabilities in the U.K. and Europe, which complement BMO's distribution in the U.S. and Canada, creating cross-sell and revenue potential in the future," he said in the note.

"We note that F&C also complements BMO's agnostic multi-strategy approach aimed at having a broad product shelf for investors to choose from."

F&C Management traces its history to the launch of the Foreign and Colonial Investment Trust in 1868 and is one of the world's oldest wealth management firms.

BMO shares closed up eight cents at C$70.54 on the Toronto Stock Exchange.

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