- Rathbones pounces on smaller rival
- All-share deal pitched as a merger
- More consolidation may follow
Wealth management group Rathbones (RAT) caught the market on the hop with the announcement of an all-share merger with the UK Wealth & Investment division of Anglo-African firm Investec (INVP).
Shares in both companies gained on the news, with Investec rising 2.4% to 455p and Rathbones adding 2.3% to £19.28.
WHY ARE THE FIRMS MERGING?
The press release says the combination of the two companies ‘represents a significant value-creation opportunity’ for both sets of shareholders.
On a media call, Rathbones chief executive Paul Stockton went further, describing the ‘strategic challenges’ facing the UK wealth management sector in terms of reducing costs while at the same time investing for growth.
‘There is a continual need for scale and efficiency in the UK wealth industry, which is ripe for consolidation’, said Stockton, who retains the CEO role at the enlarged firm, adding ‘We are pleased to be leading this process.’
The new group, which will continue to be known as Rathbones, will have around £100 billion of funds under management and administration.
Under the terms of the merger, which values Investec’s UK wealth and investment unit at around £839 million, the firm will receive new shares in Rathbones giving it a 41.25% equity share but just a 29.9% voting share.
Rathbones has form in acquisitions, having bought Scotland’s largest independent wealth manager Speirs & Jeffrey for £104 million in 2018 and integrating it into its platform.
WHAT ARE THE LONG-TERM BENEFITS?
By increasing its scale, Rathbones believes it can offer customers a better deal in investments, financial planning, fund management and banking services.
Also, the two firms have complementary business models with Stockton predicting annual cash savings of £60 million over the next three years due to lower operating costs and higher net interest income.
The deal is expected to be earnings-positive in its first full year following completion and to generate a double-digit post-tax return on invested capital (ROIC) in the third full year following completion.
Jefferies analyst Julian Roberts believes the targeted cost savings ‘do not seem a big stretch over three years’ and says the merger could generate a 15% uplift to Rathbones’ earnings per share in 2025 and a 13% return on invested capital.
The deal, which is still subject to regulatory and shareholder approval, ‘marks a step change in scale for Rathbones’, says Roberts, adding ‘We expect more consolidation in the sector.’
LEARN MORE ABOUT RATHBONES
