Pulse Check: Financial Services M&A Deals Picking Up

by: Research Recap

The announcement today that Thomas Weisel Partners Group, Inc. (TWPG) agreed to be acquired by Stifel Financial Corp. (NYSE:SF) is just the latest sign of renewed M&A activity in the the financial services industry.

Analysts are now paying closer attention to the St. Louis, Missouri-based investment bank, Stifel, which also recently purchased 55 offices from UBS Wealth Management Americas branch network.

Morningstar notes that the deal was valued at over $300 million and each Thomas Weisel share at approximately $7.60 at the time of the announcement. “$7.60 per share is over 50% higher than our most recent fair value estimate for Thomas Weisel Partners Group, but the acquisition price includes Stifel’s management’s expectation of annual pretax cost savings of $62 million from the merger. We also agree with the companies’ management that there appears to be very little overlap in their investment banking business, so the companies are highly complementary to each others’ core competencies.”

Stifel has been a serial acquisitor as of late, and we believe that Stifel’s management should have the experience necessary for a successful integration. We are maintaining our current fair value estimate for Stifel Financial Corp as we await the company’s first-quarter earnings.

In addition to several other acquisitions over the past few years, Stifel acquired the capital markets unit of Baltimore, Maryland-headquartered Legg Mason in 2005. Steve Stelmach, a FBR Capital Markets analyst,said the transaction may signal in uptick in mid-market investment bank consolidation. He said M&A activity is a “logical course of action considering the difficult economics of the business (absent a material pick-up in investment banking activity).” (Deal Journal)

Small investment banks focused on growth stocks such as technology and health care like Thomas Weisel Partners are getting swallowed up, says Andre Cappon, president of The CBM Group. “You can’t make a profit anymore by doing the occasional IPO of the technology firms, there aren’t enough of those,” says Cappon. (RegisteredRep)

AXA Private Equity’s recent acquisition of Bank of America’s (NYSE:BAC) $1.9 billion portfolio of private equity fund investments is another recent deal in the sector. AXA Private Equity’s unit also recently closed on its acquisition of the investment bank Natixis’s French private equity operations. (DealBook)

Terms of the deal were not disclosed, but Vincent Gombault, Axa Private Equity managing director for funds of funds, said the current environment suggested a single-digit percentage discount to the portfolio’s net asset value. “The market today (for good-quality portfolios) is currently in the single-digit range … below 10 percent to the NAV (net asset value).” (Reuters)

But it’s not all plain sailing for M&A. Australia’s antitrust agency last week blocked the purchase of AXA Asia Pacific Holdings (AXA) by National Australia Bank (NAB) for $13 billion. The regulator said an NAB takeover of AXA Asia Pacific would hurt competition by reducing the number of retail investment platforms in the market. “We think the ‘investment platform’ grounds for rejection is somewhat difficult to comprehend. Rather, we think that in an election year, the government would not be keen to see the major banks gain further market share,” said Craig Williams, an analyst at Citigroup. (Reuters)

NAB said it would not divest its recently acquired AVIVA unit in order to clear the antitrust hurdle.(The Australian). The bank is also hoping to acquire some of the Royal Bank of Scotland’s (NYSE:RBS) branches.(Sydney Morning Herald)

Other recent deals have also been met with diverse reactions from analysts. Earlier this month, Warburg Pincus LLC purchased about 16 million shares of Citigroup Inc.’s (NYSE:C) Primerica. Following the transaction, Rochdale Securities’ Dick Bove said Primerica’s successful spinoff made clear that Citi Holdings assets may have significant value. “The real book value of this company is substantially above what it’s being reported at and the capital is higher than what it’s being reported at,” Bove said (The Street).

See also Pulse Check Update: Is Citi’s Stellar Performance Sustainable?

Last month,Prudential plc, (NYSE:PRU) the UK insurer (not related to Prudential Financial), bid $35.5 billion to purchase American International Group Inc.’s (AIG) Asian unit. A week ago, Prudential applied for a secondary listing in Singapore. Shore Capital Group Ltd analyst Eamonn Flanagan issued a “buy” rating on Prudential. He said the Singapore listing “is an effort to populate the register with Asian shareholders who are more supportive of the deal.” (Business Times)

Keefe, Bruyette & Woods analyst Greig Paterson intimated that Prudential had overbid for the AIG business unit. He said it would make sense to pay up to about $30 billion to complete the deal. Societe Generale’s Michael van Wegen said the deal could be 11% to 21% dilutive for existing shareholders, but noted that it could lead to a heftier dividend payout in the future. (MarketWatch)

Paterson also noted that Prudential’s secondary listing suggests an interest in the country’s sizable client base. Panmure Gordon analyst Barrie Cornes predicted Prudential shares would see “a great deal of volatility” until issued rights dealings started. Lansdowne Partners’ and Mason Capital’s recent short-selling of Pru’s stock “reinforces our view that the shares will be volatile.” (Fox Business)

With rumors that some struggling US regional banks may get snapped up by the likes of Barclays (NYSE:BCS) Toronto Dominion Bank (NYSE:TD), Royal Bank of Canada (NYSE:RY) and Bank of Montreal (NYSE:BMO), look for the M&A market for financial services to continue to heat up.

Avram J. Davis

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