Swiss private bank Julius Baer is to buy Bank of America's non-U.S. Merrill Lynch wealth manager, paying 860 million Swiss francs ($882 million) for the loss-making business to boost its assets managed by 40 percent and backing the deal with plans to raise 1.19 billion Swiss francs ($1.22 billion) in new capital.
The acquisition, the latest in a string of purchases for deal-hungry Baer, is the bank's most assertive move since it bought Ehinger Armand von Ernst, Ferrier Lullin & Cie, BDL Banco di Lugano and asset manager GAM for 5.6 billion francs from UBS in 2005.
But the cost of the deal, including the new capital requirements, was taken badly by investors, who sent the shares sharply lower in early trading. At 0939 GMT the stock was down 5.6 percent at 33.44 francs, while the Stoxx Europe 600 banking sector index was up 0.4 percent.
"To us, this looks like a defensive and value-destructive transaction," said Dirk Becker of Kepler Capital Markets who rates the stock as a 'hold'. Becker criticized dilution which he calculates to be 15 percent more shares and questioned how an unprofitable business can add to Baer's earnings.
Baer said it has 530 million francs in cash to help fund the deal but will also seek to raise 750 million francs in a rights issue, including 250 million francs to fund further potential buys. It also plans to raise another 200 million francs in hybrid bonds.
Additionally, it will grant Bank of America of 240 million francs worth of shares, making the Charlotte, N.C.-based bank a 3 percent shareholder. The bank said it is also cancelling its share buyback program which was set at up to 500 million francs in February.
The acquisition will also cost around 400 million francs in restructuring and integration and retention costs, the bank said, including 120 million francs going to ensuring Merrill's most productive client advisers stay with the business.
As a result the bank will boost its assets under management by 40 percent to 251 billion Swiss francs and add to earnings from the third full year after the deal closes.
From 2015, Julius Baer targets net new money inflows of up to 6 percent, but lowered its cost-income ratio target to between 65 percent and 70 percent from 62 to 66 percent previously. The bank lowered its target for pretax profit margin to up to 0.35 percentage points from a previous target of more than 0.35 points.
Merrill Lynch's international private bank's cost-income ratio was 105 percent and outflows have roughly equalled inflows of fresh funds since Bank of America bought Merrill Lynch for $50 billion in 2008, Baer said.
The deal dwarfs the 520 million franc buy of ING's Swiss private banking arm in 2009, when Baer paid some 2.3 percent of assets acquired, whereas it said it is paying 1.2 percent for the Merrill Lynch funds.
Julius Baer has also voiced interest in BSI, a private bank owned by Generali, but failed in efforts to buy Bank Sarasin last year.
Baer has been keen to expand outside Switzerland in recent years as stark changes to banking secrecy laws weigh on revenues and profits there.
On negotiations to settle allegations by the U.S. authorities that Julius Baer helped wealthy Americans dodge tax, the bank said it felt the Merrill deal is "certainly not a negative."
But analysts cautioned that the success of the steeply-priced Bank of America deal is linked to meeting targets.
"Overall, if they do achieve the stated targets, it will turn out to be a good, transformational acquisition for Baer," Nomura analyst Jon Peace said.
Julius Baer was advised by Perella-Weinberg.
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