Notable Mergers and Acquisitions 8/11: (LM) (AEG) (MNK)

August 11, 2016 9:43 AM EDT

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*** Legg Mason, Inc. (NYSE: LM) today announced that it has reached an agreement with Bill Miller for the acquisition by Mr. Miller of all of Legg Mason's interests in LMM LLC. As a result, Mr. Miller, together with companies he controls, will own 100% of LMM.

LMM provides investment management services to Legg Mason Opportunity Trust, Miller Income Opportunity Trust and related strategies. There will be no changes to the investment team or portfolio management responsibilities as a result of the transaction.

Bill Miller, Chief Investment Officer of LMM, said: "This transaction affirms my ongoing commitment to managing our funds and to our investors. I am excited about the future of LMM, and our team is dedicated to our long-term, value-driven approach and to true active management. I am thankful to Legg Mason for our 35-year relationship and to the many great people I've worked with along the way."

"Bill has been an important part of the growth and success of Legg Mason over the years and we appreciate his many contributions. We wish Bill and his team continued success in the future. Today's announcement is consistent with Legg Mason's strategy of focusing on our nine diverse managers with size and scale that can be leveraged across global distribution," said Joseph A. Sullivan, Chairman and CEO of Legg Mason.

Terms of the transaction were not disclosed. The transaction is expected to close on or around the calendar year end, subject to customary conditions and regulatory approvals.

*** Aegon (NYSE: AEG) announces the acquisition of Cofunds from Legal & General for GBP 140 million (EUR 164 million). This transaction completes the strategic transformation of Aegon's operations in the United Kingdom from traditional life insurance to platform business, and firmly establishes the company as the number one provider in the retail platform market. The transaction is expected to close by the end of 2016, subject to customary regulatory approval, and integration of the business is expected to be completed by 2018.

"I am delighted that we are able to announce the acquisition of Cofunds," said Alex Wynaendts, CEO of Aegon. "This transaction builds on the successful repositioning of our business in the UK and the strong relationship we have built with Legal & General. By executing on our strategy, we have transformed our business into a cost efficient, scalable platform business. The acquisition of Cofunds is a unique opportunity to further accelerate the execution of our UK strategy. It enables us to create substantial value as the number one provider in the fast-growing UK platform market. I am proud that the number of customers we are helping in the United Kingdom to achieve a lifetime of financial security now exceeds three million."

Aegon targets strong improvement in returns in the UK

Aegon expects to generate GBP 60 million of annualized cost synergies by moving the Cofunds business onto the state-of-the-art Aegon technology, and by delivering efficiencies as a result of removing duplication across the businesses. These cost savings are expected to lead to an estimated Solvency II capital benefit of GBP 150 million before the end of 2017, which significantly limits the net investment for the acquisition of Cofunds.

One-time expenses to achieve the cost synergies, and to ensure a smooth transition for customers and advisers, are estimated to be GBP 80 million. These expenses will be recorded in 2016 and 2017. As a result of the cost synergies and identified opportunities for growth, the acquisition of Cofunds will contribute to achieving the group's return on equity target.

Combined strengths offer benefits to all stakeholders

Cofunds and Aegon's platform business are highly complementary. Cofunds was one of the first platforms to be launched in the United Kingdom, and is a leading player in the retail platform space with over 750,000 customers. Transferring the Cofunds business onto Aegon's platform - which uses modern technology - will lead to significant benefits for these customers and their advisors. Benefits include less paperwork as a result of straight-through processing, a broader investment range, and integration of pensions on the platform, while pricing on existing business will be maintained.

Aegon's existing platform and Cofunds have limited overlap in terms of distribution. Together with the combined product strengths this represents an opportunity for revenue synergies from cross-selling. Furthermore, Aegon secured a distribution deal with Nationwide for investment products. Nationwide is the UK's largest building society and one of Cofunds' key distributors.

Growth in capital-light fee business translates into attractive capital generation

As a result of a series of transformational divestments and acquisitions, Aegon will be the leader in the UK platform market. Following this strategic transformation, Aegon will fully focus on the growth of fee-based products on its UK platform. This capital-light strategy is expected to result in predictable, growing capital generation.

Aegon updated its capital management policy for the UK following the Cofunds acquisition. The life and pension business will continue to be operated within a Solvency II target range of 130-150%. Cofunds will write all investment products and maintain a Capital Requirements Directive (CRD) IV capital ratio of 110-120%.

Aegon expects its businesses in the United Kingdom to remain within these target ranges. Aegon's UK subsidiaries expect to resume dividend payments to the holding in 2017 in line with earlier guidance.

*** Mallinckrodt plc (NYSE: MNK) announced that it has entered into a merger agreement with Stratatech Corporation, a privately held regenerative medicine company focused on the development of unique, proprietary skin substitute products. Developmental products include StrataGraft regenerative skin tissue and a technology platform for genetically enhanced skin tissues. Financial terms of the transaction were not disclosed.

Stratatech's Leading-Edge, Innovative Technology Development PlatformIf approved, StrataGraft could be the first biological "off-the-shelf" skin substitute product for treatment of severe burns – Stratatech's proprietary tissue engineering technology produces living tissues designed to mimic human skin and promote tissue regeneration. The current standard of care for second- and third-degree burns requires autograft, the painful harvesting of a patient's tissue from an uninjured area to graft into another burned area. Severe burns can frequently cause extensive scarring, create multiple channels for infection risk and may result in multiple surgeries, all of which lead to hospitalizations of highly variable, unspecified length1.

The technology platform provides potential for new products through genetically enhanced tissues, applied topically, that produce elevated levels of natural wound healing and antimicrobial factors. Phase 1 development is underway in diabetic foot and venous leg ulcers, with other potential applications under consideration.

"The addition of this highly durable, cutting-edge development portfolio and technology platform to our hospital growth business is an excellent example of Mallinckrodt's Acquire to Invest strategy," said Mark Trudeau, Chief Executive Officer and President of Mallinckrodt. "We believe Stratatech's technology has the potential to transform the standard of treatment for wound care. Additionally, the acquisition will bring world-class Stratatech researchers with deep expertise in cell-based, differentiated regenerative medicine to Mallinckrodt's research team."

"Stratatech brings dedicated scientific and development know-how to Mallinckrodt, along with a broad, innovative progenitor keratinocyte2 technology platform," said Lynn Allen-Hoffmann, Chief Executive Officer of Stratatech. "In our next phase of development, the unique cell line used to produce living tissue in StrataGraft can also be genetically modified to potentially increase production of a variety of factors to support and promote wound healing, such as antimicrobial and vascular endothelial growth factors. This could offer utility in a number of skin injury settings beyond burns."

StrataGraft Development and Severe Burn MarketStrataGraft is an investigational product in Phase 3 development for treatment of severe, deep partial thickness burns3, with a U.S. Food and Drug Administration (FDA) approval decision anticipated by 2020. Phase 2 development of StrataGraft is underway for treatment of severe, full thickness burns4. In 2012, the FDA granted StrataGraft orphan product status, and the product is being developed as a biologic to be filed under a BLA that would confer regulatory protection until 2032.

Stratatech is currently executing two contracts which support advanced development including manufacturing, clinical studies and eventual product procurement by the U.S. Department of Health and Human Services, Office of Assistant Secretary for Preparedness and Response, and the Biomedical Advanced Research and Development Authority (BARDA). Under the terms and conditions of the contract with BARDA, Mallinckrodt is required to continue seamless execution of all contractual obligations. Stratatech also has independent contracts with the U.S. Department of Defense covering other aspects of product development.

In the U.S., approximately 10,000 patients annually are hospitalized for treatment of severe burns, and the U.S. market for skin graft products used in this application is estimated at approximately $300 million. Additional opportunities exist internationally, and the acquisition includes worldwide product rights.

Dilution Consideration and ClosingThe strength of Mallinckrodt's overall business is expected to offset slight dilution to the company's near- and longer-term adjusted diluted earnings per share. Guidance on the impact of the acquisition to the company's GAAP5 diluted earnings per share has not been provided due to the inherent difficulty of forecasting the timing or amount of items that would be included in calculating such impact. Subject to customary terms and conditions, the company anticipates the transaction will close in the second half of calendar 2016.

If approved, Mallinckrodt expects the products to be commercialized by the company's existing hospital-focused organization, enhanced by Mallinckrodt's strong relationships with hospital networks, insurance companies and group purchasing organizations to more quickly expand patient access to this unique treatment option.

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