Investec Acquiring Evolution: What Do You Need To Know?

Sep.11.11 | About: Investec Ltd (ITCFF)
Investec PLC (OTC:ITCFF), the international wealth and asset manager and specialist bank, is all set to buy Evolution PLC (OTC:EVLGF), one of most popular financial services holding companies, for a hefty £233.2 million ($371.8 million). In return, it will secure 53.8 million new Evolution shares.
How the present shareholders are going to be affected by that is another story, but to be honest, the Evolution stakeholders don't seem to be that happy with the move. The share price of Evolution fell 1.6% to 92.5 pence in London trading.
Another global competitor, Canaccord Financial (OTCPK:CCORF), which recently acquired The Balloch Group Ltd in January this year, was expected to put up a competition offer, but reportedly, it has backed out. Is it because of the high price, compared to its own market cap, or is it because Evolution is a bad investment?
Looking at the five-year financial summary, I am a bit concerned about the company's performance. The half-yearly income in 2011 has gone down to £51.6 million, compared to that in 2010. The net profit margin is at a loss of 1.83%, compared to 8.27% of Ambrian Capital (OTCPK:AMNZF) and 10.51% of ICAP PLC (OTCPK:IAPLF). Now, don't bother to include the European Islamic Investment Bank into the comparison.
Even the half-yearly adjusted operating profit seems to be less by £0.5 million than that in previous in 2010. Though assets under management (AUM) have gone up all this time, net assets has declined steadily over the last few years. The return on investment, although it is a vague metric in case of an asset management firm, also doesn't seem to be positive, running in negative figures, compared to 23.28% of Quayle Munro Holdings and 17.97% of Cenkos Securities.
So, is the increasing number of AUM the only reason that Investec seeks in Evolution? “The transaction strengthens our position in the U.K., giving us greater scale in both private client wealth management and investment banking,” Stephen Koseff, chief executive officer of Investec, said in the statement.
Okay, let's give the Investec financial sheets a careful look.
  1. Total assets under management (including both wealth management and asset management businesses) increased by 20% to £88.9 billion. These businesses segments together hold around 38.6% of the group operating profit. Operating profit from these businesses rose 53.5% (wow!) to £167.7 million.
  2. Core loans rose up by 4.8% to £18.8 billion.
  3. Total deposits rose up by 11.4% to £24.4 billion.
  4. Total operating profit before taxation increased 0.5% to £434.4 million.
  5. Adjusted shareholders' earnings increased 5.9% to £327.9 million.
  6. Net tangible asset value rose by 6.1% to 343.8 pence.
Though the loan portfolio seems to have suffered in UK and Ireland, the country's strong presence in South Africa, where the total assets under management is worth around £42.7 billion, has covered up for the economic slowdown in UK/Ireland. The company shows a strong income statement, with the cost to income ratio going up to 61.7% last year, compared to 57.8% the year before that. Along with that, the capital adequacy ratio seems to have gone up as well.
All in all, the company showed a strong financial performance last year, holding much promise for the future.
Okay, now time to look into the mergers and acquisitions section.
  1. In February 26, 2010, Investec acquired 75% stake in Leasedirect Finance Limited (LDF).
  2. On October 15, 2010, Investec completed the purchase of 100% non-controlling stake in Start Mortgages Holding Limited (Start).
  3. In March 2010, Investec buys Rensburg for £412 million.
  4. In April 2011, Investec completed the buying of the Access Capital Limited.
With strategic acquisitions from time to time, Investec has proved the efficiency of its management, resulting in bigger revenue, higher operating profit margin, increasing bottom-line and stronger presence in the market.
So, when Investec is going for Evolution, should there be a reason?
Investec per se has a strong financial performance record, and all I can say, another one or two quarters ahead might show if they made a good investment or not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.