Canada's BMO offers $1.2 bln for F&C Asset Management

* Deal values F&C at $1.15 bln plus dividend payment

* F&C says likely to recommend offer

* F&C shares surge as much as 27 percent (Adds analyst comment, background, updates BMO stock price)

By Tommy Wilkes

LONDON, Jan 27 (Reuters) - Canada's Bank of Montreal (Toronto: BMO.TO - news) has made a preliminary offer to buy UK fund manager F&C Asset Management, operator of the world's oldest investment trust, for 697 million pounds ($1.2 billion) in cash in a move to beef up its wealth management arm.

F&C, which manages over $148 billion of assets, said in a statement on Monday that BMO had made an indicative offer of 120 pence per share, a 28 percent premium to its closing share price on Friday.

The fund manager, which traces its roots back to the launch of the Foreign & Colonial Investment Trust in 1868, said it has indicated to BMO that it is likely to recommend the offer, and talks were at an advanced stage.

News of the approach sent shares in F&C soaring by as much as 27 percent to 119 pence, just below BMO's offer.

F&C shareholders would also be entitled to receive a 2 pence per share dividend for the 2013 financial year.

For BMO, Canada's fourth-largest bank, any deal would be a significant add for its wealth management division, which as of Oct. 31 had C$369 billion ($333.65 billion) in assets under administration and C$184 billion in assets under management.

BMO is one of a handful of Canadian banks that have sought to expand their wealth management arms in the wake of the financial crisis, attracted by the industry's low capital requirements and as a profit offset for weaker consumer lending growth in Canada.

Earlier this month, BMO Chief Executive Bill Downe told a financial services conference that the bank would consider acquisitions to bulk up its international wealth arm.

The deal would not be the first by a Canadian bank for a British fund manager. Back in 2007 BMO bought London-based Pyrford International for an undisclosed sum, while Royal Bank of Canada swooped on BlueBay Asset Management in 2010.

The acquisition would also be BMO's largest since it purchased U.S. lender Marshall & Ilsley for $4.1 billion in 2011, part of the bank's push to build its presence in the U.S. Midwest.

Ian Nakamoto, director of research at Montreal-based wealth manager MacDougall, MacDougall & MacTier, said he was surprised BMO was making such a big purchase outside of its core Canadian and U.S. markets, but applauded the move to bulk up its wealth management reach.

"I like that area and I think most people like that area, not only because it's less capital-intensive, but because it's fee-based and it seems to be growing," he said.

Paul Deegan, BMO's head of government and public relations, said the bank had no further comment on the FC talks.

The bank's Toronto-listed shares were down 2.1 percent at C$70.49 on Monday afternoon, trading roughly in line with the bank's Canadian peers.

OUTFLOWS

Shore Capital analyst Owen Jones said the offer, at about 13 times F&C's full-year earnings, or 0.9 percent of its assets under management, was "fair" and in line with the sector.

While rival managers like Aberdeen Asset Management (Other OTC: ABDNF - news) and Jupiter Fund Management tend to trade at higher earnings multiples, more than half of F&C's assets are run on behalf of legacy pension fund clients and attract lower fees.

Analysts at Numis said the price did not look like a "significant premium", however.

"We would therefore see 122p as very much a floor value (given the board's recommendation), with some upside potential if other interested parties were to emerge, given the price," they said in a note to clients.

F&C has struggled in recent years with client outflows and relatively weak earnings compared with some rivals, who have expanded more aggressively into higher-margin products.

That underperformance prompted activist investor Edward Bramson to take control of the group in a 2011 boardroom coup. Bramson stepped down as chairman in August, believing his turnaround strategy was fulfilled.

BMO has until Feb. 24 to announce whether it intends to make a formal offer for F&C. ($1=0.6060 British pound) ($1 = 1.1060 Canadian dollars) (Additional reporting by Euan Rocha and Cameron French in Toronto; editing by Erica Billingham, Greg Mahlich, Jeffrey Hodgson and Matthew Lewis)