Regions Financial Corp. (RF) is offering potential suitors for its Morgan Keegan broker-dealer up to $200 million in financing, according to a Bloomberg report released Sunday. This arrangement could help the two competing private-equity group suitors to finalize their bids for the broker-dealer by the end of the month, observers say.
The estimated purchase price, Bloomberg reports, is roughly $1 billion, and Regions is proposing the $200 million in loans to cover less than half of any debt financing to make the deal happen.
“Private-equity firms want to use as little cash as possible in these arrangements,” said Andy Tasnady, a financial-services compensation consultant, in an interview with AdvisorOne. “This may mean that Regions is taking on some credit risk, but it could help close a deal. Depending on the associated interest rate, it could lower the cost for a purchaser, instead of the purchaser going out and getting its own loan.”
A spokesperson contacted by AdvisorOne declined to comment. Regions hired Goldman Sachs (GS) in June to help it explore options for the Memphis, Tenn.-based brokerage firm.
“If you’re a private-equity firm, you’re asking, ‘I could pay cash, but why not finance the deal with low interest rates?’ ” said Bill McGovern (left) of the recruiting firm B-D Search in an interview. “This could make the deal sweeter and mitigate some risk or cost. Regions then could be proposing a deal that is too good to pass up.”
This financing move, McGovern adds, seems to suggest that Regions is “at least facing some challenges in getting this deal done.”
“We thought that [such delays and issues] were involved in the case of Securities America, and then they went away with Ladenburg Thalmann’s purchase of the broker-dealer,” he explained. “This one does seem like it has dragged on, but if they can resolve some issues by the end of the month, that could be good [for Regions and Morgan Keegan].”
Morgan Keegan has about 1,200 advisors. If a proposed offer comes in at about $1 billion, says Tasnady, that means each advisor has about $830,000 in yearly fees and commissions–if the brokerage firm is going for a price equal to one times total sales. If it’s going for 1.5 times sales, then each advisor has about $555,000 in yearly production.
The financing offer is a smart move if Regions wants to sell at or near the end of the month, the consultant says. “This is especially true since they are familiar with [Morgan Keegan’s] underlying assets, which makes the financing less risky for them; they can fast track it, get it approved quickly and allow perhaps higher leverage ratios and more favorable terms for the buyer,” he said.
Overall, the $200 million "sweetner" could be helpful to Regions, as it hopes to move forward with its apparently problematic sale of Morgan Keegan, experts conclude.
"There may have been fewer bidders for this business due to its old-school [culture], the depressed/volatile market, and its recent legal issues," said Chip Roame of Tiburon Strategic Advisors in an interview. "Private equity firms can sometimes be buyers of last resort, meaning when no other firm bids up the price of the business, they calculate that they can make a profit by owning the business, possibly improving it and/or waiting for a better market, and selling it a few years later."
To put in more blunt terms, says Rick Peterson, a recruiter and head of Peterson & Associates, this is looking more and more "like a fire sale."
"This franchise keeps losing its value every day that goes by when there is no buyer," said Peterson in an interview. "It's hard for the financial advisors to do business with clients each day, and it's hard or them to stay focused without worrying about the platform, retention packs and other details. There are so many imponderables."
To Peterson, the financing offer of $200 million is Regions essentially saying, "We are past due diligence. You have seen the whites of our eyes. If you are interested, do this fast, and here's an incentive to do so."