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Summary

  • Fast-growing independent investment banking advisory firm.
  • Yet valuation is stretched as investors cash out.
  • Little diversification in business model combined with tightly-controlled shareholder base.

Moelis & Co (NYSE:MC) went public last week marking one of the first investment banking IPOs seen in a long time. Shares of the global investment bank had a difficult start after the company was forced to lower its offering price in order be able to sell shares to the public.

The Public Offering

Moelis was founded back in 2007 by established bankers aiming to create a global independent bank offering high-standard solutions with truly long-lasting client relationships in mind.

The bank tries to differentiate itself by focusing on quality and its client's long-term success over short-term thinking and commissions for its employees. The bank assists clients in a range of disciplines including of course mergers and acquisitions but also restructurings, recapitalizations and other finance matters.

The company sold 6.5 million shares for $25 a piece, thereby raising $162.5 million in gross proceeds. While these proceeds belong to the company it decided to pay out roughly 80% of these proceeds to its key executives and partners which share in the windfall. The fact that insiders and top executives are directly handing out newly raised cash towards themselves raised some concerns among prospective shareholders.

This cashing out amidst shaky market conditions caused worries among prospective investors. Initially Moelis aimed to sell 7.3 million shares in a $26-$29 price range, but both the size and the price of the offering were reduced ahead of the actual offering.

Some 12% of the total shares outstanding were offered in the public offering. At Thursday's closing price of $26.09 per share the firm is valued at $1.42 billion.

The major banks that brought the company public were Goldman Sachs and Morgan Stanley as well as the company itself.

Valuation

Moelis has quickly grown its operations since inception at the time of the financial crisis. By hiring well-known bankers it quickly developed client relationships, employing 300 advisory workers at the moment including 88 managing directors in some 14 global offices. The company has quickly climbed the deal rankings for being an advisor in major deals in recent years including those of Anheuser-Busch, Yahoo, Heinz and Hilton, among many others.

The company sees continued opportunities ahead as corporate firms continue to seek independent advice, thereby avoiding the services of large financial conglomerates. The partnership culture and high quality and independent advice should continue to drive results going forward.

For the year of 2013 Moelis reported revenues of $411.4 million which is up by 6.6% on the year before and marks quite a dramatic slowdown in the firm's top-line growth compared to its previous year. As a result of pressure on compensation expenses, net earnings doubled to $70.2 million. Don't feel sorry for the bankers however - 317 bankers received total compensation of nearly $265 million last year as the S1-Filing revealed.

Rapidly growing earnings have resulted in a solid built up in the war chest with $303 million in cash and equivalents being available. The firm has no debt outstanding, although $67 million in capital lease obligations appear on the balance sheet.

This results in net operating assets being valued around $1.2 billion. This values the net operating assets in the business at roughly 3 times annual revenues and 17 times annual earnings.

Investment Thesis

As noted above, Moelis had a difficult time convincing investors to participate in this offering. Volatile market conditions as well as the fact that the vast majority of the public offering proceeds will be used to pay out partners did not cause enthusiasm among investors.

As such Moelis was forced to price the offering below the low end of the preliminary offering range, some 9.1% below the midpoint of that range. Shares managed to recover a tiny bit, trading about a buck higher at the moment of writing.

While I applaud the rise of Moelis, the advisory firm lacks significant scale and diversity across its activities, and therefore its fortunes are heavily tied to the market itself. This is a similar problem which other smaller boutiques like Evercore (NYSE:EVR) and Greenhill (NYSE:GHL) are facing as well. Paying a rather steep multiple, after accounting for the fact that Moelis will have to pay higher taxes as a publicly-traded company, the valuation is steep given that earnings are at a strong point in the cycle.

On top of this comes the dual stockholding structure which gives Mr. Moelis 97% voting power, thereby ensuring tight control. On the positive side, Moelis has plenty of cash which it really doesn't require under this business model allowing it to initiate a $0.17 quarterly dividend. This provides investors with a current 2.6% dividend yield.

While I applaud the great building efforts made in recent years, the offering seems a bit rich to my taste despite continued desire for independent advice. I told myself to stay away, at least for now.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Moelis: With A Banker's Payday, It's Time To Be Cautious