Fund management group Henderson is set to snap up ailing rival New Star in a £115 million shares and cash deal.
Under the terms of the agreement, Henderson will stump up £22 million for New Star’s ordinary shares – equating to 2p a share, £73 million for its preference shares and pay off £20 million of the group’s debt. Current chief executive John Duffield will also leave the business once the deal goes through.
In a letter to investors, Duffield said the move would bring two main benefits for investors. “First it will stabilise New Star’s financial situation, which we know has been a concern for investors and advisers over recent months,” he said. “Secondly, and more importantly for the long-term, Henderson is fully committed to supporting our desire to restore fund performance to the levels achieved prior to 2007.”
Shareholders will, however, be left with little to show for their investments. They are in line for £5.4 million but the majority of the cash will go to creditors. New Star had previously warned that private investors were likely to end up out of pocket.
The takeover, which still requires approval from New Star and Henderson shareholders, would give fund management arm Henderson Global Investors £15 billion of funds under management, and make it the fifth biggest group in the industry.
It is launching a placing of up to 72.3 million shares to help fund the deal, which it says will be “substantially earnings enhancing” by 2010. Henderson is also reported to be taking on around half of the 310 including the leading fund managers.
New Star, which was formed in 2001, has been badly knocked by the turmoil in the financial markets with funds under management slumping from around £23 billion last year to around £10 billion. It was forced to suspend dealing in several of its unit trusts last year.
Last month, it agreed a £240 million debt-for-equity swap with its lenders after its share price plummeted.
Darius McDermott, managing director of Chelsea Financial Services, says the deal should give unit trust holders a "sense of renewed hope".
“Many shareholders are certain to feel aggrieved as they are effectively to get 2p in cash for each New Star share," he adds. "[But] for unit trust holders this should be greeted as positive news.
"Henderson has been in the retail fund management game for a long time and its considerable experience should provide a safe pair of investment hands for the incoming assets. There could also be synergy between the two asset managers in a number of areas, namely bonds and multi-manager."
Henderson's chief executive, Andrew Formica, has also hinted that he wants to keep the top talent at New Star and address funds that have been serially underperforming.