Schorsch's RCAP to raise $466 million in secondary offering

Broker-dealer using proceeds, in part, for pending acquisitions and possible new ones

May 29, 2014 @ 1:05 pm

By Bruce Kelly

RCS Capital Corp. dropped nearly 5% in trading Thursday after the broker-dealer said it intended to sell 20 million shares, netting $466 million.

Shares of RCS Capital, known by its ticker symbol RCAP, closed trading on Wednesday at $29.74. By 3:17 p.m. New York time Thursday, the stock was down $1.33 and was trading at $28.41 after dropping to a low of $27 earlier in the day.

The company said on Wednesday after the market closed that it planned to make the stock offering.

More: RCAP revenue drops, but Nicholas Schorsch isn't worried

Trading volume in RCAP increased significantly after the news of the proposed offering, with shares changing hands at least two and a half times the average volume. According to Yahoo Finance, 200,000 shares of RCAP had traded by 3:17 p.m. Thursday, compared with a three-month daily average of 87,123 shares.

RCAP executive chairman Nicholas Schorsch, along with RCAP Holdings and RCAP Equities, will be one of the sellers of the shares. Currently, Mr. Schorsch and the two related business entities own 85% of the Class A shares of the broker-dealer, which had its initial public offering last June. The company sold 2.5 million shares at $20 a share for a total of $50 million.

After the proposed sale of shares, Mr. Schorsch and those related entities will control between 42% and 54% of the common stock, according to a registration statement of securities filed Thursday with the Securities and Exchange Commission.

The company expects to use the stock sale's net proceeds to complete $185.3 million worth of pending acquisitions and for general corporate purposes, including other acquisitions, according to the filing. Another $26.3 million of the proceeds from the stock sale will be deposited in escrow, to be used to repay the notes issued by RCAP Holdings to a broker-dealer it acquired last year, First Allied. And $33.4 million is slated to be used for outstanding First Allied debt.

Luxor, a hedge fund that bought preferred shares of RCAP as part of the financing for RCAP's acquisition earlier this year of Cetera Financial Group, will receive $20 million in fees in connection with the issuance of the convertible notes, convertible preferred stock and Class A common stock.

The “net proceeds” figure of $466.3 million for the stock offering derives from shuffling a few numbers. The 15 million primary shares, sold at $29.74 each, would yield $446.1 million. Add $50 million from a private placement, and that would create $496.1 million in gross proceeds, according to Andrew Backman, managing director, head of investor relations for RCAP, in an email to InvestmentNews.

Subtract almost $30 million in fees to underwriters from that figure, and the net proceeds to the company are $466.3 million.

“The five million secondary shares being sold are by the founding partners and yield no proceeds to the company,” Mr. Backman said in an email. That means shares controlled by Mr. Schorsch and RCAP's other founding partners could raise $148.7 million, if sold at $29.74.

This story has been updated with new information from RCAP on the calculation of net proceeds.

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