Mumbai: Baltimore (US)-based asset management firm T Rowe Price Global Investment Services Ltd on Monday agreed to buy a 26% stake in UTI Asset Management Co. Pvt. Ltd (AMC) for $140 million (around Rs652 crore), about 3.25% of its average assets under management in October.
At this price, UTI AMC is valued at around Rs2,500 crore.
T Rowe Price, which was managing assets worth $366.2 billion in September, will pick up a 6.5% sake each from four exisiting equal shareholders of UTI AMC—State Bank of India (SBI), Life Insurance Corp. of India (LIC), Punjab National Bank (PNB) and Bank of Baroda (BoB).
After the sale, each of these shareholders will be left with an 18.5% stake in UTI AMC. The sale will be completed after regulatory approvals.
Following the deal, T Rowe Price will emerge as the biggest shareholder at UTI AMC, India’s fourth largest mutual fund with assets worth Rs76,847.34 crore in October, and play a key role in managing it.
“We have seen a lot of interest from a number of global investors. The agreement with T Rowe Price has been finalized and the deal is now subject to regulatory approvals,” Jaideep Bhattacharya, chief marketing officer, UTI AMC, said. “We expect the deal to be completed soon.” He declined to comment on the management changes after the stake sale.
Reliance Capital Asset Management Ltd, HDFC Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd are the top three fund houses in the Rs7.62 trillion Indian mutual fund industry.
The valuation of UTI AMC is lower than the past two deals struck when the markets were rising till the fourth quarter of the fiscal 2008. Infrastructure Development Finance Co. Ltd had paid 5.67% of Standard Chartered AMC’s assets in March 2008 to acquire the latter and Eton Park had paid even more, 12.9% of assets, for a 5% stake in Reliance Capital Asset Management in December 2007.
After the market crash of 2008, valuations have plunged. In July, Nomura Asset Management Co. Ltd picked up a 35% stake in LIC Mutual Fund Asset Management Co. Ltd at 2.4% of its total assets.
In September, the financial services unit of engineering firm Larsen and Toubro Ltd announced plans to buy DBS Cholamandalam Asset Management Ltd for Rs45 crore, valuing the firm at about 1.6% of its assets under management.
The latest deal has been sealed at a time when the Indian mutual fund industry is going through a tough time. A recent ruling by market regulator Securities and Exchange Board of India (Sebi) has restrained fund houses from charging upfront commissions for mutual fund investments from 1 August. Since a large part of an AMC’s profitability depends on commissions, the rule would keep the AMCs in the red for next few quarters. It would also affect the valuations of asset managers.
A recent study by consultancy firm McKinsey and Co. said AMCs will see profit erosion in fiscal 2010 and 2011. “The industry is likely to witness consolidation as smaller AMCs may not be able to accommodate the acute profit and loss stress,” it said.
Aditya Agarwal, managing director, Morningstar India Pvt. Ltd, a mutual fund research house, said: “I think they (T Rowe) have got a good deal from the perspective that they are buying into an AMC with a large retail asset base. Retail assets are sticky and it is not easy to create this kind of an asset base.”
According to Agarwal, it is not appropriate to compare the UTI deal with earlier deals that were done when markets were doing better. “Moreover, the recent entry load rule by Sebi has hit the industry hard and morale is down, at least in the short term,” he said.
UTI AMC took two years to identify a strategic partner. In 2007, it started planning an initial public offering (IPO) and a pre-IPO placement to a strategic partner. It had to postpone its IPO plans due to adverse market conditions. “We have not yet decided anything regarding the IPO,” Bhattacharya said.
Founded in 1937, T Rowe Price is a global investment management organization that provides mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans, and financial intermediaries.