Nuveen Lead Bidder for Flagship, a Midwest Rival

Municipal bond fund specialist John Nuveen & Co. is emerging as the leading suitor for Flagship Resources Inc., its smaller midwestern rival.

Nuveen is negotiating to buy Flagship, which manages $4.2 billion of fund assets, for less than $100 million, sources close to both companies said.

Chicago-based Nuveen has $6.3 billion of assets under management, primarily in municipal bond funds.

Officials at Dayton, Ohio-based Flagship declined to comment. But Flagship chairman Bruce Bedford has stated publicly that he would entertain offers for his company, which, like Nuveen, specializes in municipal bond funds.

Nuveen officials did not return telephone calls seeking comment.

Small fund companies like Flagship have come under increasing pressure to sell, as they lack the wherewithal to compete with household names like Fidelity Investments or Vanguard Group. Still, Nuveen's interest in Flagship took some industry insiders by surprise.

"Why Nuveen would want more munis is beyond me," said one investment banker.

But Flagship's appeal may lie in a relationship it has with brokerage giant Merrill Lynch & Co. Flagship manages $361 million in private accounts through its participation in a wrap-fee program Merrill offers to wealthy clients.

Nuveen, which is primarily owned by a Minnesota-based insurance company, The St. Paul Cos., is also considered a takeover target. By acquiring more assets, Nuveen could make itself more attractive to suitors, said Burton J. Greenwald, a fund consultant in Philadelphia.

Flagship, which has invited several fund companies to kick its tires, has had trouble finding a buyer. The fund company may be demanding more than what some investment bankers say it's worth, which is no more than $100 million, or about three times estimated revenues.

Keen competition to acquire mutual funds has driven prices up to four or five times revenues - a level Flagship is not likely to obtain.

Flagship's narrow niche hurts its prospects, observers said. About 90% of its assets are in municipal bond funds, which have been overshadowed by an extended bull stock market.

Negotiations between Flagship and Liberty Financial Cos. were scuttled more than two months ago, a source close to Liberty said. And a deal with Aim Management Group Inc. fell through in February, sources said.

A Liberty official acknowledged the company had received an invitation to bid from Flagship, but said "we haven't actively pursued it." Aim's chairman, Charles T. Bauer, declined to comment.

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