National Planning Holdings acquisition could be real boost to LPL earnings: analyst

Industry executives have been chattering for at least a month about the blockbuster deal

Aug 10, 2017 @ 5:37 pm

By Bruce Kelly

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If LPL Financial Holdings Inc. acquires the four broker-dealers in the National Planning Holdings' network, the largest independent contractor broker-dealer could see earnings growth next year of 20%, according to Steven Chubak, an analyst at Nomura Securities.

He estimated the purchase price of NPH to be $750 million. That reflects a multiple of 15 times the network's estimated EBITDA, or earnings before interest, tax, depreciation and amortization. That price is slightly under NPH's annual sales, in line with LPL's current price of $45 and change per share, Mr. Chubak noted.

Because LPL is self-clearing, and the NPH broker-dealers clear with either Pershing or Fidelity's National Financial Services, the largest independent broker-dealer has the ability to see economic gains from "cash sweep" and "attachment fees," Mr. Chubak wrote in a report last Friday. Those are fees that clearing firms earn from client cash positions and charge advisers for various services. Clearing firms can take the lion's share of such fees.

The four NPH firms are National Planning Corp., Invest Financial Corp., Investment Centers of America Inc. and SII Investments Inc. Combined in 2016 they generated $909 million in revenues, according to InvestmentNews data.

Industry executives have been chattering for at least a month about the blockbuster deal. If it were to come to pass, LPL, which has a new CEO in Dan Arnold, could potentially grow to more than 17,000 advisers, an increase of 21.5% over its current size.

So far, when asked about a merger, executives from LPL and NPH have said they don't comment on market rumors. Scott E. Romine, the CEO of NPH, last week took the extraordinary step to send an email to the 3,500 reps and advisers affiliated with the broker-dealers to say he would not comment about such rumors.

Sitting on $527 million in cash available for corporate use, LPL could go two ways to lift earnings, according to Mr. Chubak. It could buy back more stock, or use its capital to acquire broker-dealers, according to Mr. Chubak.

While there is more risk in the latter option, the market for strategic broker-dealer mergers and acquisitions is heating up. Earlier this week, Kestra Financial Inc. said it had acquired a 600 rep and adviser firm owned by insurance company H. Beck Inc. It was the second sizeable broker-dealer acquisition in as many weeks.

Mr. Chubak met last week with LPL management, including Matt Audette, CFO, and head of investment relations Chris Koegel, and discussed the merits of buybacks versus mergers and acquisitions, as well as new product launches, such as LPL's new Mutual Fund Only platform, according to the note.

"Though Audette did not comment on specific deals, he noted that he expects continued industry consolidation as size and scale become increasingly important," according to the report. "For LPL, Audette commented that any potential strategic M&A opportunities would need to be weighed carefully, with high accretion hurdles to achieve risk-adjusted returns."

And because of its cash position, LPL would most likely not have to dilute its shares by issuing more stock but instead could issue debt, Mr. Chubak noted.

LPL finished 2016 with $2.13 per share in actual earnings. By adding NPH, as well as managing costs, driving growth to its Mutual Fund Only platform, and continuing share buybacks, the firm by 2020 could earn as much as $5.75 per share, according to Mr. Chubak.

"And while the underlying growth assumptions may be ambitious, we note that LPL is the only firm in our coverage where we see a viable bull case of 50% upside," he wrote.


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