Canada’s largest bank by market value has put the cat among the pigeons in the wealth management sector with a surprise bid for 260 year-old UK firm Brewin Dolphin (BRW).
RBC’s cash offer of 515p per share, which has been recommended by Brewin’s board, values the business at £1.6 billion or 62% more than its market value last night.
LARGE PREMIUM
The offer represents a significant premium to Brewin’s closing price of 318p last night and is far higher than any sell-side analyst was projecting based on earnings.
It also represents a price of 2.8% of Brewin’s £55 billion of assets under management, reflecting what RBC calls the ‘exciting strategic opportunity’ to combine their UK businesses.
As of last December, on a pro-forma basis the combined operation would have had £64 billion of assets, revenues of £545 million and 600 client advisers.
RBC says it ‘highly values Brewin Dolphin's position as a market leading advice focused wealth manager in the UK and Ireland with a longstanding record of delivering superior client service’.
The bank also calls Brewin ‘one of the foremost asset gatherers in a secular growth and consolidating market’ and ‘an excellent strategic fit’.
There is no mention of cost synergies, presumably to avoid unsettling the Brewin talent pool, but Julian Roberts at Jefferies expects RBC ‘to drive additional profitability by making cost savings on systems and support staff’.
Roberts estimates a 20% reduction in costs would lift Brewin’s pre-tax profit margin from 25% to 40%, meaning a lower multiple and a quicker pay-back.
RIPPLE EFFECT
Shares in rival wealth manager Rathbones (RAT) jumped 10% to £19.52 as investors turned their attention to other potentials deals.
On a pre-synergy basis, RBC is paying 21 times current year earnings for Brewin compared with an undisturbed multiple closer to 13 times.
Rathbones currently trades on 14 times this year’s earnings, so a bid at a similar multiple to Brewin would imply a price at or over £30 per share.
Coincidentally, applying the 2.8% ratio of price to assets would also produce a target of roughly £30 per share says Roberts.
