* Schroders, Cazenove agree 424 mln stg deal
* Deal valued at around 2.5 pct of Cazenove assets under mgt
* Cazenove manages 18.7 bln stg
* Will boost Schroders private banking assets
* Schroders shares up 2.3 pct
By Tommy Wilkes and Kate Holton
LONDON, March 25 (Reuters) - Fund manager Schroders Plc is to pay 424 million pounds ($646 million) for smaller rival Cazenove Capital, as it moves to bulk up its private banking arm running money for wealthy clients.
The agreed transaction, announced on Monday, is the largest in Schroders' over 200-year history and means two of London's oldest names coming together under the same roof.
Rising regulatory costs have squeezed margins in the business of managing money for well-heeled clients and Schroders said Cazenove will give it more scale to compete, as well as offering scope to lower costs.
Pretax profit in Schroders' private banking unit halved to 11.8 million pounds last year.
If the tie up goes ahead, Schroders will increase its assets under management in private banking by about three-quarters to more than 28 billion pounds, the firm said. Schroders' total assets under management will increase by nearly 10 percent to 230.7 billion.
Under the deal's terms, Cazenove, which was established in 1823 and has reportedly counted Queen Elizabeth II among its clients, will keep its name.
"In combining with Schroders, we will create a pre-eminent independent private banking and charities business in the UK, with a broader capability covering investment management, financial planning, deposit-taking and lending services," Andrew Ross, chief executive at Cazenove, said.
Cazenove's fund management arm was split from the wider group after JP Morgan formed a joint venture with Cazenove's UK investment banking business in 2005.
"We believe strategically there is a good fit between the two UK wealth management businesses and it will provide a useful complement to the UK funds business," analyst David McCann at brokerage Numis said in a note.
Credit Suisse analyst Gurjit Kambo said the valuation - at around 2.5 percent of Cazenove's assets under management - was fair and was in line with what the market was expecting, after the two companies said on Friday they were in talks.
Aside from small add-on deals, the British asset management industry has not seen a large acquisition since Henderson Global Investors scooped up troubled rival Gartmore in early 2011 for around 2.3 percent of assets.
Kambo said it was too early to predict the start of a wider consolidation despite the industry's fragmentation, since the size of Schroders' cash reserves - at 581 million pounds after the deal - made its ability to finance buys of this size unique.
Shares in Schroders were up 2.3 percent by 1015 GMT, against a 0.8 percent rise in the FTSE 100.
Schroders said it expects to save between 12 million pounds and 15 million in pretax costs per year from the deal.
These costs will largely come from economies of scale in UK funds distribution and infrastructure, the firm said, and not from investment management.
As well as wealth management, Cazenove also manages 5.8 billion pounds in investment funds. Schroders said Cazenove's portfolio managers in UK and European equities, fixed income, multi-manager and absolute return strategies will join the firm.
"We are not looking for any cost synergies in the front office of our wealth management business or investment funds," Michael Dobson, chief executive officer at Schroders, said on a conference call with journalists after the announcement.
Clients will see no change in the people looking after them following the deal, Ross at Cazenove said.
Agreement of the deal comes two weeks after Schroders' high-profile head of UK equities, Richard Buxton, resigned, raising the possibility private investors in his fund will follow him when he leaves in June.
Schroders said under the agreed deal Cazenove shareholders would receive 135 pence in cash per ordinary share. They have until April 19 to decide on the offer.
"I am confident the transaction will create long-term value and benefits for clients, shareholders and employees," Dobson said.