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. Last Updated: 07/27/2016

Zurich Sells Unit to Deutsche for $2.5Bln

FRANKFURT, Germany -- Deutsche Bank on Monday said it had agreed to purchase Zurich Financial Services' U.S. fund unit Scudder in a long-awaited $2.5 billion deal, catapulting it to fourth place among global asset managers.

The deal sees Deutsche leave insurance and embrace asset management and affords Zurich an exit from its underperforming U.S. fund business, burdened with integration trouble since the Swiss group's U.S. push started in 1995.

Deutsche, Germany's largest bank, said it would swap 75.9 percent of its holding group VHDB, valued at 1.13 billion euros ($1.03 billion), for Scudder. This price tag includes insurer Deutsche Herold and other insurance assets but excludes a valuation for the Bonnfinanz investment advisory arm, which is also part of the deal. Deutsche said the deal would give a one-time, tax-free capital gain of almost 1 billion euros and would add to earnings from 2003.

Zurich Financial, Europe's third-largest insurer, expects $700 million in net proceeds to flow into the group as a result of the deal, less than expected by many investors hoping for a sizeable cash injection to restore confidence in the firm.

Key to the deal is an agreement granting Zurich distribution access to Deutsche's retail-banking branches and Deutsche access to Zurich's. The accord includes cooperation in asset management, insurance and banking products.

Scudder had assets under management of $278 billion at the end of June, meaning Deutsche paid 0.9 percent of funds under management, at the lower range of recent similar transactions.

Price talks continue over plans to swap Deutsche's Bonnfinanz unit and the asset management operations of Zurich Financial Services in Germany and Italy. Zurich's U.K. fund unit Threadneedle Investments was not included in the asset swap.

Deutsche, which plans to integrate Scudder into its own fund activities, said the deal gives it a global platform and critical mass in the retail fund business with over 1 trillion euros of assets under management.

With it, Deutsche embraces a pure banking and asset management model, scorning the bancassurance model, fully integrating banking and insurance activities, which has been adopted by rivals.

"Scudder gives us important critical mass in retail asset management in the United States. Scudder's strengths in the areas of actively managed investments for institutional clients and in the Asia-Pacific region are equally essential," said Michael Philipp, fund head on Deutsche's management board.

For Zurich, the deal allows it to refocus management time on a return to growth rather than on trying to blend the Scudder and Kemper funds families with their disparate investment philosophies and distribution systems.

The Swiss-based group is backing out of managing clients' assets and manufacturing funds itself, refocusing on insurance and the distribution of third-party fund products in a bid for cost-efficiency.

The sale fits in with Zurich's strategy of withdrawing from businesses that have unpromising growth potential, are not cost-efficient or too capital-intensive. A divestment drive is to raise $4 billion for debt reduction and future growth.