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Invesco Ltd. (NYSE:IVZ)

Analyst Call To Discuss The Acquisition of Atlantic Trust By CIBC

April 11, 2013 4:30 pm ET

Executives

Loren M. Starr - Chief Financial Officer, Senior Vice President and Senior Managing Director

Analysts

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

William R. Katz - Citigroup Inc, Research Division

James Shanahan - Edward D. Jones & Co., L.P., Research Division

Michael Lipper

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Unknown Executive

This presentation and comments made in the associated conference call made today may include forward-looking statements. Forward-looking statements include information concerning future results for operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent form 10-K and subsequent forms 10-Q filed with the SEC. You may obtain these reports from the SEC website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Invesco Analyst Call. [Operator Instructions] As a reminder, this conference is being recorded. Your speaker for today is Mr. Loren Starr. Mr. Starr, you may now begin.

Loren M. Starr

Thank you very much, and thank you to everyone who's dialed in. Today, we announced the sale of Atlantic Trust to CIBC, and what I'd like to do is take the next few minutes to walk through the strategic rationale and the financial impact of the transaction and then, we can open it up to Q&A. So let's get started.

So let me start out by saying that Invesco's strategic focus continues to be to meet our clients' needs across the globe by delivering investment capabilities, managed by our own investment team and leveraging the common platform. We think that's the right model for a global independent asset manager. Atlantic Trust is an excellent business and is extremely successful in what it does. And in contrast to Invesco's focus, it meets its clients' needs by leveraging an open architecture investment platform, and this is a different model but we think it's the right model for this business.

Given the implications of the strategic differences to both Invesco and Atlantic Trust, the agreement to sell the business to CIBC essentially offers compelling advantages for Atlantic Trust clients and ultimately, to the shareholders of both Invesco and CIBC. Critically, we think there's strong cultural alignment between Atlantic Trust clients and CIBC, and we expect the businesses should come together easily. We believe Atlantic Trust clients will ultimately benefit from the expanded set of resources that CIBC has to offer. And in addition, the opportunity set for Atlantic Trust employees should be broader and bigger as part of CIBC.

For the prospective Invesco shareholders, important benefits include improved allocation of capital and resources to support future growth in the core investment management business and immediate expansion of Invesco's operating margin.

While not material, in the whole, we did feel it would be useful to outline the key financial measures that will be impacted by this disposition. So some background. As of December 31, 2012, Atlantic Trust represented 3% of Invesco's total AUM or $20.3 billion. In 2012, Atlantic Trust generated $1.9 billion of long-term net flows or roughly 15% of our total long-term flows. We anticipate that the transaction will result in the reduction of approximately $115 million of annualized net revenue, $85 million of annualized adjusted operating expenses and $0.05 of EPS for Invesco. In addition, this transaction will increase Invesco's adjusted operating margin by 50 basis points. It's our intention to use the $212 million of proceeds received to repurchase our shares. The buyback will help offset the dilution by $0.03 per share, so the net impact after buyback will be approximately $0.02 per share annualized. And finally, we expect the deal to close in the second half of 2013.

And with that, I'd like to now open the lines up for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Dan Fannon of Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I guess Loren, first, just on some of the specifics on the numbers. I guess, what is the time period you're assuming for the redeployment of the proceeds to get to the $0.03?

Loren M. Starr

We would expect to buy back the shares fairly soon after close. So that would be our expectation. Obviously, depending on market and -- the timing, it could vary. But we would expect to deploy it pretty quickly.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. And then, I guess, can you discuss other factors as you look at your business over the next kind of 12 months and you look at the margins? Are there other businesses or segments that are either not of scale or maybe not core as you think about longer term, that you might be exiting? Or what other levers are there that you think can help drive margins higher going forward?

Loren M. Starr

Thanks for that question, Dan. I think it's a good one. And importantly, I'd like to say, this is a bit of a distinct situation where we, obviously, have engaged in selling a part of the business that is not something that we would be looking to do or thinking about at all. So this was really a business that was operating independently. With that said, it is absolutely our priority to continue to focus on optimizing our business. It's something that we have done over the last many, many years. And we have discussed and probably give even more clarity as we go into the next earnings call about how we continue to refine our business model to improve margins and improve earnings growth. I believe we do feel we're very much on the path, and scale is one element of it, as you mentioned. And importantly, as we are able to take some of our core products and allow them to grow on a global basis, we think that's where the greatest opportunity for margin expansion [indiscernible]

Operator

Our next will come from Bill Katz of Citigroup.

William R. Katz - Citigroup Inc, Research Division

Two questions for you. First one is, any kind of distribution arrangement with CIBC on the other side of this? And then the second question is, if I'm doing the math right, looks like it's about 10x after-tax earnings at about 1% of assets. It seems to be pretty thin multiples, in my opinion, for the natural benefits that I think that business brings to CIBC. Any thoughts there?

Loren M. Starr

So I mean, on the first point in terms of distribution arrangements, there's nothing formal in place with CIBC. We have a very good, obviously, relationship and have had one historically, and we'll continue to have one going forward but nothing specifically related to this transaction. In terms of the math and the deal value, I'm not going to get into a discussion around the value to either party other than we do believe strongly, both of us, that this is absolutely the right thing for the clients. And the value is there for both parties. It's a win-win. But again, it would be inappropriate for me to sort of get into the detail on kind of what the true value metrics are, relative to other deals.

William R. Katz - Citigroup Inc, Research Division

Is there any recourse respect to Invesco if assets fall post the transaction or is it once, you're out, there's no recourse?

Loren M. Starr

No. There's -- I mean, fairly standard, there are certain adjustments that would happen if there was a significant loss of assets as a result of the transaction. And it's absolutely not our expectation. Obviously, a lot of work is being done to make sure that the clients see the value in this transaction and understand it's business as usual, if not, sort of a better situation.

Operator

Our next question is from James Shanahan of Edward Jones.

James Shanahan - Edward D. Jones & Co., L.P., Research Division

I have a question about your disclosure here about revenues and earnings. Historically, Atlantic Trust, particularly, their -- I guess, their MLP segment had been a source of pretty significant performance fee revenue. Does this sale actually reduce revenue and earnings volatility associated with performance fees going forward? Or perhaps, does it say something about your outlook for performance fees within the MLP space over the course of the next year or 2?

Loren M. Starr

Thank you for that question. No, it really has nothing to do, specifically, with the MLP. It's a fantastic product that's done incredible things for clients. It certainly is part of the Atlantic Trust business and it goes with the business. It does mean, of course, that we will no longer have the benefit of enjoying those performance fees after the sale. But it is, certainly, we think it's a great product and one that our clients have enjoyed, and Atlantic Trust clients will continue to enjoy.

Operator

Our next question comes from Michael Lipper of Lipper Advisory Services.

Michael Lipper

Two questions. One, do you have any covenant not to compete? And are they time sensitive? And then, I have a second question.

Loren M. Starr

Yes. I think in terms of the actual deal elements, I think of them as fairly standard elements in terms of what we can and won't do. I mean, obviously, through the sale of this business, we're making the statement that we're not pursuing this line strategically. It's not where we're -- where we are. So again, and I don't want to get into specific comments on what the covenants are, how they work. But you can certainly assume from what I'm saying that it is not our intention, strategically, to pursue this line of business.

Michael Lipper

Okay. The second question, does this have any implications for you in your non-North American business?

Loren M. Starr

No, it does not. This has been a focus business in the U.S., national business, but it has had no elements of it, sort of, go beyond the U.S.

Michael Lipper

But you would be free to do something analogous outside of the U.S.?

Loren M. Starr

Yes. I mean again, I think, for probably the same reasons we said, it's strategically not connected in the U.S., those -- the same reasons would apply outside of the U.S. So again, I can't comment specifically on what the covenants suggest or are going to be in place related to this deal. But I can, again, say that our strategy is not one that would have us pursuing this outside the U.S.

Operator

Our next question is

[Audio Gap]

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

[indiscernible] business cross-selling. So to what extent did you [indiscernible] or sell other [indiscernible]? And are there kind of other revenue dis-synergies that haven't been incorporated into the numbers you gave us earlier in the call?

Loren M. Starr

That's a great question, Ken. And the reality is that they're -- the business has really been extremely separate. There has not been cross-selling of these products in -- outside of the -- into Invesco, with distribution, very limited. Very, very limited. So there's probably, in MLP, $200 million or something that has been sort of sold outside of the Atlantic Trust client base. But again and vice versa, very -- again, very little, if anything, of Invesco products has been distributed into the Atlantic Trust client base. So it's pretty clean in terms of the separation.

Operator

[Operator Instructions] Our next question will come from Mike Carrier of Bank of America Merrill Lynch.

Michael Carrier - BofA Merrill Lynch, Research Division

Loren, just on, I guess, the timing, like, why now? And then, when I think about it, you explained it fairly well right there and just in terms of separate business. And long term, maybe it makes more strategic sense, and this isn't exactly new to me, people expected this at some point. But I think on the flip side, and granted it's a small number, but it seemed like the value of the business would have been more a little bit more and then, if you just buy it back, it would've been neutral to earnings. So I mean, like, what drove it now and I don't know, maybe expectations were just maybe a little bit too high in the past, but valuation versus what you can do with that cash in terms of buybacks, it seems like even though -- we're talking about pennies here, it's not a big deal. But it just seems like it's a little bit of a surprise than it wouldn't have been on the accretive side?

Loren M. Starr

Yes. I mean, I think right now, it has everything to -- right partner, right -- it really was not something that we were out looking for sort of to sell the business. I think we were really pleased to see a partner come forward that made sense for the clients, and so that's what drove the timing, and it continues to drive the timing of how this is going to close. Essentially, the value was what the value was in terms of having 2 partners come together and figure out what made sense. And again, you can try to market-time these things and you get the exact maximum value and then, that -- it just doesn't work in transactions like this. I mean, you just kind of go when it's ready. So we're, listen, very pleased with how this ended up. We think it's the right thing, as I mentioned before, for our clients, for CIBC, and for us. We think it will be a long-term, very positive and accretive thing for us even though, sort of, short-term dilution you see it, we think -- but the allocation of our resources and capital are not just what we're using for buyback, but in terms of future expenses and what we're committing to in terms of technology and so forth. It's far more leverage-able for our core business than it would be for Atlantic Trust. And that will have great value.

Operator

At this time, we have no further responses for questions.

Loren M. Starr

Well, let me just end up by thanking everybody for calling in. Hopefully, it was helpful to give a little more clarity. There's only so much you can do in a press release. So again, there'll be more opportunity to talk about the deal, I'm certain, when we get onto our earnings call if anybody still have any questions. Thank you very much.

Operator

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

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