The news regarding RCS Capital (RCAP), owner of the Cetera Financial Group of independent broker-dealers, is not getting better. The question that many industry watchers have is: How much worse will it get?
It shares trade near $1.15, down sharply from about $4.25 in early August and way off its two-year high of about $39.50. The firm’s market capitalization stands at under $100 million.
While Bloomberg News reported on Monday that RCAP might sell Cetera for as little as $700 million, though, an equity analyst following the company says that figure is simply too low. At least one industry expert, however, disagrees with that view.
“A 10/19 Bloomberg article indicated RCAP was looking to sell Cetera Financial Group for $700 million,” explained William Katz of Citigroup in a note shared with Barron’s. “While we do believe RCAP is likely pursuing various options to deal with tightening liquidity and high debt load, we believe the article is likely misguided on two key dynamics.
“If correct, the $700 million would suggest RCAP’s common equity value is essentially worthless, considering the firm has $850 million in debt and another $300 million in preferred equity,” Katz stated. “Considering RCAP paid $1.15 billion for Cetera, we find it unlikely that the firm would look for such a ‘fire sale’ that would ostensibly ‘zero out’ common equity holders.”
Nonetheless, “RCS Capital needs to raise cash and cannot default on its debt,” said Jon Henschen, a recruiter in the independent broker-dealer space, in an interview. “When it comes to money-making operations, all they’ve got are the IBDs. So, that’s what they would need to sell in order to cover their debt.”
According to Henschen, “The low stock price is forcing the situation.” And the low value put on RCAP shares, he notes, is due to both weak results and the lingering impact of the accounting scandal that rocked the firm and related entities about a year ago.
Past, Present, Future
Speculation about the future of Cetera, which is led by Larry Roth, has been rampant for some time but increased following news in August that RCS Capital’s would sell its troubled wholesale-distribution unit to Apollo Global Management (APO) for $25 million. The two firms said at the time that they were forming AR Global Investments to be owned 60% by Apollo and 40% by RCAP.