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U.S. money manager T. Rowe Price will buy a 26 percent stake in UTI Asset Management, India's oldest mutual fund firm, two sources with direct knowledge of the deal said on Thursday.

One of the sources said the deal would be worth $125 million to $135 million, which would value UTI at 3-3.4 percent of its August-end average assets under management of about 740 billion rupees ($15.5 billion). The other source declined to give a value.

"The agreement is being drawn up and will be signed shortly," the first source said.

UTI could not be reached for comments.

"For UTI as an asset management company, they stand to gain a lot from the T. Rowe expertise," said Aditya Agarwal, managing director and head of India for fund research firm Morningstar.

However, he said the valuation favoured T. Rowe Price.

"I think it's a good deal for the buyer, not for the seller," Agarwal said. "3.5 percent, getting retail asset, I think it's a good proposition for T. Rowe."

State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corp of India, all state-run, own 25 percent each of UTI Asset Management.

Last July, UTI Asset Management dumped plans for a $480 million initial public offer of a 49 percent stake due to falling stock markets, and instead started to look for a partner.

UTI's chief marketing officer said in January the firm, which has the largest branch network in India with a presence in more than 500 districts, was interested in a partner that could give it access to the world market.

Valuations of Indian mutual fund firms have dropped sharply following the share market slump in 2008 and a regulatory change from August that bans entry fees charged for selling funds.

The ban on entry fees is expected to slow growth in the industry, add to distribution costs, cut profitability and delay the path to breakeven for newcomers.

Last week, the financial services unit of Indian engineer Larsen & Toubro (LART.BO) said it planned to buy DBS Cholamandalam Asset Management for 450 million rupees, valuing the firm at about 1.6 percent of its August-end average assets.

In November last year, Religare Enterprises Ltd agreed to buy Lotus Mutual Fund, a unit of Singapore state investor Temasek and London-based Sabre Capital, for about 1-2 percent of Lotus's assets, according to media reports.

In contrast to those valuations, Infrastructure Development Finance Co agreed to buy Standard Chartered's Indian fund unit for about 6 percent of assets in March last year. And in 2007, hedge fund Eton Park paid about 13 percent of assets of a piece of Reliance Capital's fund arm.

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