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Eric Sprott and Rick Rule combine asset management businesses

|Includes: PHYS, Sprott Resource Corp. (SCPZF)

Canadian asset manager Sprott (TSX:SII) has signed a letter of intent to acquire California-based Rule Investments, a company that manages more than US$1.3 billion in client assets, from natural resource investor Rick Rule in an all-share deal worth up to $125 million, it said Wednesday.

The acquisition, which will include Global Resources Investments, Terra Resource Management and Resource Capital Investments, will see Sprott issue 20 million common shares as consideration for the deal, with the possibility of Rule earning up to an additional 8 million common shares five years from closing, subject to certain earnings targets.

Sprott's shares closed at $4.50 on Tuesday, making the offer worth about $90 million at closing and $125 million if all 8 million shares are issued.

Rule Investments and all of its businesses, collectively known as The Global Companies, are investors in the natural resource sector, providing both investment management and specialized broker services. The Global Companies generated EBITDA of approximately US$7.4 million in 2009.

The deal, which is part of Sprott's US expansion plans, is expected to benefit both Sprott and Rule, as the two will work together to develop new products.  The addition will also increase Sprott's assets under management by almost US$500 million, while growing its overall assets under administration by over US$850 million.

"In the Global Companies, we are acquiring a specialized asset manager and broker dealer with an investment approach that is complementary to ours at Sprott and a product line that will further diversify our asset and earnings mix," said CEO of Sprott, Peter Grosskopf.

Following the closing of the deal, Mr. Rule will join Sprott's executive management team for a minimum three year term,  and will be a nominee for a director position at Sprott's next annual meeting of shareholders.

Under the terms of the agreement, the seller has agreed to a lock-up period for its Sprott shares, with one-third of the shares being released from lock up every year for three years from the date they were issued.

The transaction is subject to due diligence and the approval of Sprott's board of directors, among other conditions. Both companies are aiming to close the deal by year-end.

Toronto-based Sprott currently operates through three business units: Sprott Asset Management LP, a manager of mutual and hedge funds; Sprott Private Wealth LP, which provides wealth management services to high net worth individuals; and Sprott Consulting LP, which provides management, administrative and consulting services to other companies, including Sprott Resource Corp. 

Disclosure: no position