ZURICH Swiss private bank Julius Baer BAER.VX is to buy Bank of America Merrill Lynch's (BAC.N) overseas wealth-management business for up to 860 million Swiss francs ($882 million), getting a huge boost in Asian growth markets.
Julius Baer's acquisition of the loss-making unit means that about half of all the Swiss bank's clients will be in faster-growing emerging markets - chiefly Asia but also Latin America and the Middle East - up from around one third now.
Baer, under pressure from an international attack on Swiss banking secrecy that is weighing on profit, is keen to expand abroad.
The Merrill acquisition is the bank's biggest since it bought Ehinger Armand von Ernst, Ferrier Lullin & Cie, BDL Banco di Lugano and asset manager GAM for 5.6 billion francs from Swiss bank UBS UBSN.VX in 2005.
But investors balked at the total cost, estimated at 1.47 billion francs, sending its shares sharply lower on Monday.
The bank is proposing to partially fund the deal by raising 1.19 billion Swiss francs ($1.22 billion) in new capital, including issuing 240 million francs worth of shares to Bank of America, which will end up with about 3 percent of Baer.
Costs of around 400 million francs include restructuring the acquired business and retaining its most productive client advisers, Baer said.
At 1552 GMT the stock was down 7.2 percent at 32.8 francs, compared with a flat Stoxx European banks index .SX7P.
"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 of existing shareholders and questioned how an unprofitable business could add to Baer's earnings.
Others said the success of the steeply priced deal is linked to meeting targets including the transfer of assets to Baer.
The Swiss bank said Merrill clients will transfer between 57 billion and 72 billion to it by the end of 2015, a wide margin because some clients may choose to leave while Bear could turn others away. The deal could lift assets managed by around two-fifths to 251 billion Swiss francs .
"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.
The Merrill deal dwarfs Baer's 520 million franc buy of ING's ING.AS Swiss private banking arm in 2009, when Baer paid 2.3 percent of assets acquired, whereas it said it is paying only 1.2 percent for the Merrill Lynch funds.
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 to fund more acquisitions It also plans to raise another 200 million francs in hybrid bonds.
The bank is cancelling its share buyback program, set at up to 500 million francs in February.
Baer said it could add to earnings from the third full year after the deal closes.
The deal is Bank of America's latest effort to sell non-core businesses to streamline a company built through decades of acquisitions. It has lagged peers in recovering from the global financial crisis largely because of losses and lawsuits tied to its 2008 purchase of subprime lender Countrywide Financial.
Bank of America said the transaction will have an immaterial impact on its balance sheet, financial results and capital ratios. It also agreed to provide research and other products to the Swiss bank and to refer clients between the two organizations.
Greg Gatesman, currently Chief Operating Officer of the Merrill business, will take the same role at Bank Julius Baer and the Julius Baer Group, while Michael Benz, Head of Global Wealth & Investment Management for Asia Pacific, will be chairman of the Asia business, which he will head up with Tom Meier, Baer's Asia CEO.
(Additional reporting by Oliver Hirt in Zurich and Rick Rothacker in Charlotte; Editing by Erica Billingham)