Consolidation on cards as City mulls talk of £1bn deal for Cazenove

Published on Monday 16 November 2009 20:20

A FLURRY of City broker consolidation is thought to be imminent, partly fuelled by the resurgent stock market.

"Rightly or wrongly, the market has a spring in its step, and that could be the tipping point for takeovers and joint ventures," one senior financial figure said.

The centrepiece deal looks to be an expected near-1 billion acquisition by American investment banking giant JP Morgan Chase of the 50 per cent of Queen's broker Cazenove it doesn't already own. That will trigger major payouts for some top City financiers at 190-year-old Cazenove.

The final details are being hammered out for a deal that would cement the relationship that began five years ago, when the two financial powerhouses formed a broking joint venture.

That deal was meant to fuse the best of Cazenove's old-school, aristocratic broking contacts with JP Morgan's renowned dealmaking prowess and deep pockets. "Caz" had a corporate clients' book to die for (currently 36 of the FTSE 100), while Morgan could supply areas such as major debt, where the British firm was weaker.

Cazenove's top brass, notoriously private at the best of times, were understood to be worried that a complete sale would worry some of its many blue-chip clients and, therefore, a joint venture was seen as the best of all possible worlds.

Time has moved on, however, and both sides seem to have moved more towards the idea of a full takeover, even though it is likely the venerable Cazenove brand name would be retained.

With the FTSE 100 index about 20 per cent up currently after its 31 per cent fall in 2008, sources say financial firms are also looking at takeover activities on some of the lower broking slopes.

Two specialists in the Aim-listed mid-market sector, Altium Capital and Seymour Pierce, are reported as having held tentative discussions with overseas investors about possible full or partial takeovers.

Seymour Pierce has more Aim-listed clients than any other UK broker. At this stage, however, it is thought both Altium and Seymour prefer to remain independent. Neither would comment yesterday. Cazenove and JP Morgan also would not comment.

KBC Peel Hunt and Hoodless Brennan are among an array of smaller brokers periodically touted as objects of takeover interest. Analysts believe rich overseas investors see buying up relatively boutique brokerages as a good way to gain entrance to the UK market.

However, they say a reason many deals fall through is that buyers believe it is less expensive to poach individual teams of brokers rather than pay the extra "goodwill" to acquire the brand name. Hence, star broking teams defect quite frequently.

Few observers predict that we will see a return to the high water mark of City takeovers that characterised the mid-1990s to the early-Noughties, however.

Then billions of pounds were splashed out to acquire major City names, with Morgan Grenfell, Kleinworts, Smith New Court and Warburg going to Deutsche Bank, Dresdner, Merrill Lynch and Swiss Bank Corporation, respectively.

Societe Generale swooped on Hambros, CSFB got BZW, and Merrill Lynch took over Mercury Asset Management, while Robert Fleming fell to Chase Manhattan and Schroders' fund management arm went to Citigroup. Consolidation this time round is definitely likely to be more muted.

A typical example last year was when Religare, the Indian stockbroker, snaffled up Hichens Harrison.

Back at Cazenove, senior figures stand to enjoy huge cash windfalls if the deal with JP Morgan goes ahead.

It is thought JP Morgan will pay about 500-525p per share for the remaining stake.

David Mayhew, the Cazenove chairman who joined the broker 40 years ago, is set to receive up to 19 million. He owned more than 3.6 million ordinary shares and another 400,000 in restricted shares at the end of 2008, according to public filings.

Michael Power, the finance director who joined the Cazenove board five years ago, and Alan Carruthers, who has been head of equities for six years, are believed to be in line for 10m and 5m, respectively.

Another expected to receive a windfall is Robert Pickering, who quit as chief executive last year, and John Paynter, who stepped down as vice-chairman of Cazenove last year.

JP Morgan has until next February to exercise an option to buy the remaining 50 per cent of its investment banking arm under the agreement it signed five years ago.

One analyst commented: "This sort of consolidation speculation never really goes away, but it is more lively currently.

"If stock markets are in a poor state, financial advisers press takeovers as the best way to respond with cost-saving synergies.

"When times are better, like now, the contra-rationale put forward for a deal is for the new firm to ride on the back of buoyant stock markets."

A number of institutional investors – including the likes of Aviva, Standard Life and Prudential – injected funds into Cazenove when it ditched plans to float in 2001. It is said they would share about 100m from any sale to JP Morgan.

None of them would comment on the size of their stakes, however.