IPO Preview: RCS Capital Corp.

Jun. 4.13 | About: RCS Capital (RCAP)

Based in New York, NY, RCS Capital Corp. (NYSE:RCAP) scheduled a $55 million IPO with a market capitalization of $535 million at a price range mid-point of $20 for the week of June 3, 2013.

Three other new IPOs are scheduled for IPOs this week. The full IPO calendar is here.

  • S-1A filed May 30, 2013
  • Manager, Joint Managers: JMP Securities; Ladenburg Thalmann
  • Co Managers: Aegis Capital; Maxim; National Securities; Realty Capital; Newbridge Securities; Northland Capital

SUMMARY
RCAP was created in December 2012 with three subsidiaries. The largest subsidiary is a broker dealer that makes commissions from the sale of products for American Realty Capital.

American Realty Capital is the actual 'sponsor' of RCAP. American Realty Capital believes it is the leading sponsor and investment manager of direct investment programs in the United States. Specifically, American Realty Capital is a full-service investment advisory firm sponsoring a series of investment programs with an emphasis on publicly registered non-traded real estate offerings

RCAP's three subsidiaries perform services for American Realty Capital. The three subsidiaries are expected to pay 10% of their income to RCAP. RCAP is in essence a shell company with no other assets.

The proforma income stream for recent periods to RCAP is the following:

2010: -$147,000
2011: $213,000
2012: $412,000

March 2013 quarter: $1,500,000.

RCAP had a very good March quarter, but it's out of proportion relative to recent calendar results. Insiders will control 97% of the votes, which is also a negative.

VALUATION

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualized March qtr

Cap (MM)

Sls

Erngs

BkValue

TanBV

in IPO

RCS Capital Corp.

$535

13.0

89.2

9.2

9.2

10%

Click to enlarge

Glossary

RCAP is selling 10% of itself in class A common stock. RCAP will try to support its stock price by paying an annualized yield of 3.6% on class A common stock. To do that RCAP needs to generate just $3.3 million pretax.

RCAP tries to make the case that it can grow into its IPO valuation, but the historical results don't support that thesis. And it's entirely possible their projections are based on shaky assumptions.

OBSERVATION
This is a 'manufactured' IPO trying to take advantage of the stock market's recent high averages. RCAP expects the market to value its 10% share of the three subsidiaries income at $535 million, which doesn't make any sense, based on historical results.

Also, if the market does top out as many expect, then the parent's direct investment programs can be expected to suffer.

CONCLUSION
Avoid the RCAP IPO. To put the above conclusions and observations in context, the following is reorganized, edited, and summarized from the full S-1 referenced earlier:

OVERVIEW
RCAP is a holding company incorporated in Delaware on December 27, 2012, created to own an economic and controlling interest in subsidiaries.

These subsidiaries are
(1) Realty Capital Securities, LLC, or Realty Capital Securities, a wholesale broker-dealer registered with the Securities and Exchange Commission, or the SEC, and the Financial Industry Regulatory Authority, Inc., or FINRA, including its division operating under the name "RCS Capital," which provides investment banking and capital market services;

(2) American National Stock Transfer, LLC, newly registered as a transfer agent with the SEC; and

(3) RCS Advisory Services, LLC, a company also operating under the name "RCS Capital" that provides transaction management services.

The three operating subsidiaries all will derive the majority of their revenues from services provided on behalf of, directly to or for, American Realty Capital and its affiliates.

About American Realty Capital
American Realty Capital is the leading sponsor and investment manager of direct investment programs in the United States.

BUSINESS
RCAP believes that the combination of Realty Capital Securities, ANST and RCS Advisory will be synergistic, allowing RCAP to offer direct investment programs and their sponsors an integrated solution for each stage of a program's life cycle.

RCAP's wholesale broker-dealer (Realty Capital Securities) was the largest wholesaler of direct investment program offerings in 2012, with equity capital raised of approximately $3 billion.

In 2012, Realty Capital Securities generated more than $286 million of commission, fee and other revenue, or approximately 9.7% of the $2.95 billion raised during the year. In addition, members of the combined Realty Capital Securities and RCS Advisory teams were engaged to provide $7.1 million of investment banking services during 2012, related to offerings and liquidity events for both American Realty Capital and non-American Realty Capital programs. American Realty Capital expenditures for transfer agent services for 2012 approximated $4.9 million. In addition, the various teams comprising RCAP's transaction management service provider provided substantial services in connection with RCAP's wholesale broker-dealer business.

RCAP's revenues are primarily driven by the amount of capital being raised in the direct investment program area. In 2012, Realty Capital Securities served as a broker-dealer with respect to the raising of approximately $3 billion in capital of direct investment programs, which was an increase of 67.2% over 2011.

To the extent that American Realty Capital's fundraising increases, RCAP expects to benefit from increased revenues. According to Stanger, the amount of capital raised in the entire direct investment program area increased by 32%, from $10.1 billion in 2011 to $13.3 billion in 2012.

To the extent that RCAP is able to increase our market share with direct investment sponsors in addition to American Realty Capital and the overall direct investment program area continues to grow, RCAP's revenues should also increase.

NON-CONTROLLING INTEREST
RCS Capital Corporation will have a controlling interest in each of the operating subsidiaries and, as a result, RCAP's financial statements will be the consolidated financial results of the operating subsidiaries. However, following the offering RCAP will only own 10.3% of the economic interest in the operating subsidiaries and therefore will be required to show the 89.7% RCAP does not own, or the non-controlling interest, in RCAP's financial statements.

FEE INCOME
Management Fee
RCAP's operating subsidiaries will pay RCAP's Manager a management fee in an amount equal to 10% of the aggregate net income of the three operating subsidiaries.

Incentive Fee (note: this incentive fee is too complicated to understand)
In addition, the operating subsidiaries will pay RCAP's Manager an incentive fee, calculated and payable quarterly in arrears, that is based on earnings and stock price.

The incentive fee will be an amount (if such amount is a positive number) equal to the difference between:
(1) the product of (X) 20% and (Y) the difference between (i) Core Earnings for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price per share of common stock of all of RCAP's public offerings multiplied by the weighted average number of all shares of common stock outstanding (including any restricted shares of Class A common stock and any other shares of Class A common stock underlying awards granted under our equity plan) in the previous 12-month period, and (B) 8.0%; and
(2) the sum of any incentive fee paid to RCAP's Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive fee is payable with respect to any calendar quarter unless our cash flows for the 12 most recently completed calendar quarters is greater than zero.

VOTING RIGHTS
One vote per share of Class A common (public) stock. Initially, four votes per share of Class B common stock

After RCAP's initial public offering, the Parent (RCAP Holdings, LLC) will control 97.2% of the voting power of outstanding capital stock.

DIRECTED SHARE PROGRAM
Under a directed share program, the underwriters have reserved up to 20% of the shares of Class A common stock being offered in the IPO for sale to interested directors, officers, employees and other individuals associated with us and members of their families, as well as any entities controlled by them, at the initial public offering price.

EMPLOYEES
As of March 31, 2013, the operating subsidiaries had 198 full-time employees.

DIVIDEND POLICY - 3.6% annualized
RCAP intends to pay a dividend for the quarter ending September 2013 of $.18, which if annualized is a 3.6% return on class A common stock.

The dividends will be funded by distributions made by operating subsidiaries from their available cash generated from operations

USE OF PROCEEDS
RCAP expects to net $49 million from its IPO.

RCAP intends to use the IPO proceeds to expand its lines of business by funding internal growth and by acquiring complementary businesses, as well as for general corporate purposes.

Disclaimer: This RCAP IPO report is based on a reading and analysis of RCAP's S-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.