BBAY Bluebay

Royal Bank of Canada (RY) Monday agreed to pay GBP963 million for fixed-income fund manager BlueBay Asset Management PLC (BBAY.LN), giving the Canadian bank more products to push through its wealth management business and underscoring its global ambitions.

The offer price of 485 pence a share is a 29.1% premium to BlueBay's 375.70 pence closing price Friday, and BlueBay shareholders will also receive a previously announced dividend of 7.5 pence per share, for a total consideration of 492.5 pence a share. BlueBay directors with shares representing 20.5% of the company's equity have already pledged to vote in favor of the deal.

At the close, the stock was up 111 pence, or 30%, at 487 pence. Analysts said the offer is a full valuation, at about 19 times expected fiscal 2011 earnings, and that they don't expect another suitor to emerge. The offer price translates to around $1.53 billion or C$1.56 billion.

The transaction comes amid broader consolidation in the global asset management industry, as independent managers look to tap bigger partners' sales channels, and banks are either unloading or beefing up their asset management arms, depending on how much capital they have. Last week, Europe's largest hedge-fund group, Man Group PLC (EMG.LN) completed a $1.8 billion purchase of smaller rival GLG Partners Inc.

"It looks to be a pretty good kick-start for (RBC) on the international side. It's about a 30%-plus increase in non-domestic assets under management. That's a meaningful push," said Brad Smith, an analyst at Stonecap Securities Inc., an independent broker in Toronto.

BlueBay will be folded into RBC Global Asset Management, part of the Wealth business, with more than C$200 billion in assets under management. The overall Wealth unit manages about C$250 billion.

"When you take a look at our scale in Canada and the U.S. and add in BlueBay, with the stroke of a pen we are a full service, global provider of fixed-income solutions," said John Montalbano, CEO of RBC Global Asset Management.

The Canadian bank has been steadily building its U.K. business, particularly in wealth management where it hopes to repeat its success in Canada at winning business from ultra-wealthy private investors.

George Lewis, group head of RBC Wealth Management, in an interview with Dow Jones Newswires on Monday said the U.K. "is becoming a third home market" for the bank after Canada and the U.S., and that its expansion in U.K. asset management comes as it builds out a London-based capital markets division and recently created a standalone U.K. unit within RBC Wealth.

Analysts said they expect further acquisitions in asset management, after RBC previously said it might spend up to $6 billion on these types of purchases to help meet 2015 earnings targets.

"They've set a course now. They're going to have to continue to build on what they've got because they've made a sizeable commitment," Stonecap's Smith said.

BlueBay, with about $40 billion under management at Sept. 30 in long-only and hedge-fund fixed-income strategies, floated on the London Stock Exchange in November 2006 with a valuation of GBP571 million. At that time, it had $8 billion under management, after having formed in 2001 with financial backing from Barclays PLC (BCS) and Shinsei Bank Ltd. (8303.TO).

Chief Executive Officer Hugh Willis and Chief Investment Officer Mark Poole, the company's co-founders, have agreed to reinvest into BlueBay funds 25% of the roughly GBP83 million in cash they'll each receive from RBC for their shares. If they leave within three years, they'll forfeit 40% of those investments.

Willis said he's looking forward to having more time to focus on building BlueBay's business rather than running a public company, and that RBC's strength and stability make it "an ideal partner."

BlueBay's strong asset growth since listing--tempered only by a brief decline during the financial crisis--is underpinned by increasing demand from institutions and wealthy individuals for corporate-bond and emerging-market debt funds.

According to data from EPFR Global, fixed-income funds have had a record year for inflows, with high-yield funds attracting more than $20 billion so far this year and emerging-markets bond funds upping their assets by around $41 billion from net new investor money.

In the nine months to Sept. 30, all bond funds tracked by EPFR had received net inflows of $339.5 billion, compared with $199.02 billion in the same 2009 period.

Credit Suisse and Spencer House Partners advised BlueBay on the transaction, while Perella Weinberg Partners and RBC Capital Markets are joint financial advisers to RBC.

-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; margot.patrick@dowjones.com

(Caroline Van Hasselt in Toronto contributed to this article.)

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