Wednesday’s news that Raymond James will acquire Regions Financial’s Morgan Keegan brokerage followed more than six months of anticipation, but received a mostly tepid response from industry observers.
Regions said that the transaction will drum up $1.18 billion in proceeds for its firm, including a $930 million stock purchase agreement with Raymond James and a $250 million dividend payment from Morgan Keegan that is set to come in before the deal closes.
With the deal, Regions will also indemnify Raymond James for Morgan Keegan’s litigation issues dating back to before the deal, which it estimated at $210 million.
“I think it’s not a home run, but it’s a good single. It’s what they needed to close the transaction out,” analyst Marty Mosby, managing director at Guggenheim Securities, said of Morgan Keegan. “They are going to have the strategic partner that they would like to have in order to still service their customers, and they will improve their capital ratios, which was the back end goal of this whole thing.”
Morgan Keegan employees should mostly benefit from the deal, Mosby said. While there will likely be some consolidation in operating support areas, employees in distribution and support may benefit from Raymond James’s resources.
“Not being in a bank is going to be a very big positive, because this is a growing company, versus somebody who is having to deal with overhanging issues,” Mosby said. “I think it’s a breath of fresh air for Morgan Keegan employees as they make this transition.”
Rochdale Securities analyst Dick Bove said he also saw the deal as a modest win for Regions, which still owes $3.5 billion for funds it received through the Troubled Asset Relief Program.
“I would say this is a minor positive, not a major positive,” Bove said.
The benefit that the deal will have to Regions’ Tier 1 common capital will be well below what was expected at nine basis points, according to Bove. Regions is also anticipating that the return on the approximate $1 billion they receive from the deal will equal Morgan Keegan’s profits, he said.
“They have this additional cash and a slight benefit to their Tier 1 common ratio,” Bove said. “They will be able to go back and buy back their TARP preferred from the government, and I guess the next shoe to drop would be how much in common shares do they have to offer to do that?”
While Raymond James has signaled that retention bonuses will be coming for Morgan Keegan’s financial advisors, Ron Edde, a senior executive recruiter at Carlsbad, Calif.-based Armstrong Financial Group is skeptical.
Edde said he estimates that Morgan Keegan’s more than 1,100 financial advisors produce $1 billion per year for the firm.
“If you were to spread that out and give them all a 10% retention bonus to stay, that’s an extra $110 million they would have to come up with,” Edde said. “And 10% is not going to get it done, and they know it.”
Edde said he thinks Raymond James will wait to pay those retention bonuses until after the financial advisors have repapered their clients over to Raymond James. The longer they wait, the less they have to pay, he said, while making another transition to another firm more laborious for the financial advisors.
Raymond James declined to provide more details on the prospective retention bonuses on Wednesday.
“The anticipated retention amounts paid to FA’s will be very fair and the Morgan Keegan management team expects very high retention,” Dennis Zank, chief operating officer at Raymond James Financial, said in a statement.
Stifel’s Retention Pool For Morgan Keegan Employees Was Larger: SourcesLorie Konish writes for On Wall Street.