Financial Engines (FNGN) Tops Q3 EPS by 1c; Will Acquire The Mutual Fund Store in $560M Deal

Financial Engines (NASDAQ: FNGN) reported Q3 EPS of $0.24, $0.01 better than the analyst estimate of $0.23. Revenue for the quarter came in at $78 million versus the consensus estimate of $79.42 million.

Financial Engines also announced that it has signed a definitive agreement to acquire The Mutual Fund Store, L.L.C. (“The Mutual Fund Store”), a prominent nationally-branded independent Registered Investment Adviser, from Warburg Pincus and management for total consideration of approximately $560 million, including cash and stock. The transaction is expected to produce 2016 earnings per share accretion of approximately 25%, assuming the transaction closes late in the first quarter of 2016, and to increase the longer-term growth rate of the combined company. Based on the terms of the transaction, Warburg Pincus is expected to become Financial Engines’ largest stockholder with a beneficial ownership of approximately 12.5% following the closing of the transaction and Michael Martin, managing director of Warburg Pincus, will be appointed to Financial Engines’ board of directors upon closing.

The acquisition will enable Financial Engines to expand its independent advisory services to 401(k) participants through comprehensive financial planning and the option to meet face-to-face with a dedicated financial advisor at one of more than 125 national locations. The Mutual Fund Store is a fast-growing Registered Investment Adviser providing personalized financial planning and objective, fiduciary advice through advisors in locations across the United States. It has approximately 345 employees, approximately 84,000 accounts at about 39,000 households and over $9.8 billion in assets under management, as of October 31, 2015.

Strategic Rationale

As a result of the acquisition, Financial Engines intends to expand its independent advisory services for 401(k) participants through The Mutual Fund Store’s comprehensive financial planning and in-person advisors powered by Financial Engines’ scalable advice technology. Financial Engines believes this will deliver:

• Greater usage and retention of Financial Engines’ services

• Expanded market opportunities to help 401(k) participants with more complex needs

• Significant earnings per share accretion

• Strong synergies and higher future growth

“We are excited to meet the growing demands of our customers and help 401(k) plan participants with their complete financial picture,” said Lawrence (Larry) Raffone, president and chief executive officer of Financial Engines. “By leveraging Financial Engines’ scalable advice technology to power The Mutual Fund Store’s services and in-person advisors, we believe we will be able to make high-quality investment advice and comprehensive financial planning available to everyone with access to our services through their employer. This acquisition advances our vision to provide independent advisory services to more people and we believe will also fuel significant future growth.”

“We are thrilled to join forces with Financial Engines to provide comprehensive advisory services through the workplace,” said John Bunch, chief executive officer of The Mutual Fund Store. “This transaction marks an exciting new chapter for our organization and for the advisory industry. We believe this powerful combination, based on our shared commitment to providing independent, objective advice, will benefit the customers we serve and accelerate growth opportunities for the combined entity.”

“We believe the combination of Financial Engines and The Mutual Fund Store uniquely positions the combined entity to take advantage of a growing opportunity to help millions of individuals reach their financial goals with objective, fiduciary advice,” said Michael Martin, managing director of Warburg Pincus. “We look forward to becoming a stockholder of Financial Engines and working closely with Larry Raffone and the rest of the management team.”

Outlook

For the company, post-acquisition, based on financial markets remaining at November 2, 2015 levels, through all of 2016, and taking into account an anticipated closing of the acquisition of The Mutual Fund Store in the first quarter of 2016, Financial Engines estimates its 2016 revenue will be in the range of $403 million and $410 million and 2016 non-GAAP adjusted EBITDA will be in the range of $125 million to $130 million. Under typical market conditions, Financial Engines estimates that 2016 revenue will be in the range of $419 million to $426 million and non-GAAP adjusted EBITDA will be in the range of $137 million to $142 million. We expect that any synergies will be realized beginning in 2017, and beyond.

“We believe the acquisition to be significantly accretive to adjusted earnings per share in fiscal year 2016. Importantly, post-closing we expect to remain debt free and we expect to generate significant free cash flow that will enable us to continue to invest in the business and drive growth initiatives,” said Ray Sims, chief financial officer of Financial Engines.

Transaction Details

The total transaction purchase consideration includes approximately $250 million in cash and 10 million shares of Financial Engines common stock. The combined company will be debt free following the transaction.

Based on the common stock portion of the transaction, Warburg Pincus will receive Financial Engines common shares representing approximately 12.5% of the pro forma shares outstanding. Concurrent with the closing of the acquisition, Michael Martin, Managing Director of Warburg Pincus will be appointed to serve on Financial Engines’ board of directors.

The transaction is expected to close in the first quarter of 2016 and is subject to regulatory approvals and other customary closing conditions. DBO Partners acted as financial advisor to Financial Engines, and Pillsbury Winthrop Shaw Pittman provided legal counsel. JP Morgan acted as financial advisor and Wachtell, Lipton, Rosen & Katz provided legal counsel to Warburg Pincus.

Conference Call

Financial Engines will host a conference call to discuss this transaction as well as its third quarter 2015 financial results today at 5:00 p.m. ET. The live webcast and presentation can be accessed from the Company's investor relations website at www.financialengines.com. The conference call can also be accessed live over the phone by dialing (888) 348-6435, or (412) 902-4238 for international callers. A replay will be available beginning one hour after the call and can be accessed from the Company’s investor relations website, or by dialing (877) 870-5176, or (858) 384-5517 for international callers; the conference ID is 10074933. The conference call replay will be available until November 12, 2015.

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