RPT-Fitch: No impact on Schroders' ratings from proposed acquisition of Cazenove

Thu Mar 28, 2013 9:24am EDT

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March 28 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that the acquisition of Cazenove Capital (Cazenove) by Schroders plc is unlikely, in isolation, to impact Schroders Investment Management's (Schroders IM) 'M1' Asset Manager rating and Schroders plc's 'A+' Long-term Issuer Default Rating (IDR).

Fitch considers that the proposed acquisition will increase Schroders' scale and capabilities in private banking and wealth management. The acquisition also strengthens Schroders' already well established presence in the UK intermediary business, with key additions in UK small and mid-caps, Multi-manager and absolute return strategies. The transaction preserves the company's global, diversified business profile. Growth in strategic regions (Asia and US) and client segments (Sovereign Wealth Funds and private saving pools) is now more likely to be organic.

In the agency's view, the integration of Cazenove will be facilitated by a strong cultural fit between the two companies. Key Cazenove portfolio managers have been identified and incentivised to stay in the new structure. Cazenove's investment processes and Front Office team's organisation are not expected to change to provide continuity of service to investors. Nevertheless, Fitch would expect some medium-term adjustments in the two UK Equities teams, following the impending departure of Schroders' Head of UK Equities in June 2013. Finally, Fitch expects Schroders' scalable operational and technology platform to absorb easily the GBP5.8bn Intermediary assets that Cazenove managed as at end February 2013. For comparison, Schroders net inflows in 2012 were GBP9.7bn.

Schroders' IDR of 'A+', the highest among its asset manager peers, reflects factors including its diversified franchise, strong profitability, conservative risk management processes, absence of leverage and high cash position and generation. If completed, Schroders' proposed acquisition of Cazenove could further benefit business diversification and should not require the group to take on any debt. Fitch also acknowledges the potential for benefits of scale to accrue to the private banking business via the indicated synergies, which could further improve cash flows.

However, the proposed GBP395m cash consideration does not come without risks and would reduce Schroders' surplus cash resources and investment capital buffer, albeit from a currently very high level and potentially (partially) mitigated by interim profits. Although not Fitch's expectation, downward pressure on the IDR could arise from an increase in leverage or material reputational damage resulting from the acquisition. Fitch will continue to monitor all these factors as the proposed transaction progresses.

Schroders IM's 'M1' rating, the highest asset manager rating, is based on the company's global, diversified, long established franchise and a solid risk management framework. Disciplined, research driven investment processes across asset classes and a robust operational infrastructure also differentiate Schroders from peers. The Asset Manager Rating covers the London-based investment activities of the company with the exception of the alternative asset management business and does not include the private banking business.

Schroders IM, which is the core subsidiary of Schroders plc ('A+'/Stable/'F1'), is a global asset management company with GBP212.8bn under management as at end-December 2012 (63% institutional, 37% retail, excluding private banking), 45% of which is invested in equities.

Cazenove is an independent asset management business substantially owned by current and former employees. Cazenove's assets under management were GBP17.2bn as at end 2012 (GBP5.1bn in investment funds, GBP12.1bn wealth management).

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