A report Monday that RCS Capital Corp. was looking to sell Cetera Financial Group for $700 million left at least one analyst scratching his head.
Citing anonymous sources, Bloomberg News said RCS Capital, or RCAP, was exploring such a sale, working with
Lazard Ltd. to find potential suitors. Former nontraded real estate investment
trust czar Nicholas Schorsch built Cetera Financial Group, starting in June 2013 with the acquisition of independent broker-dealer First Allied Holdings.
RCAP's former executive chairman and currently its largest shareholder, Mr. Schorsch then went on an M&A tear, over the next two years buying close to 10 retail brokerage firms. RCAP paid $1.15 billion in cash for four Cetera branded broker-dealers and close to $500 million in cash and stock for half-a-dozen other firms.
The analyst, Bill Katz of
Citigroup, questioned the low price for Cetera and its 9,500 retail financial advisers cited
in the article. He did not, however, rule out that RCAP is looking at its options, particularly as the company's share price has recently tanked.
'MISGUIDED'
“While we do believe RCAP is likely pursuing various options to deal with tightening liquidity and high debt load, we believe the article is likely misguided in two key dynamics,” wrote Mr. Katz. “If correct, the $700 million would suggest RCAP's common equity value is essentially worthless considering the firm has $850 million in debt and another $300 million in preferred equity. Considering RCAP paid $1.15 billion for Cetera, we find it unlikely that the firm would look for such a 'fire sale' that would ostensibly 'zero out' common equity holders.”
(More: How Nick Schorsch lost his mojo)
A sale of Cetera at $700 million would leave RCAP in a hole, Mr. Katz noted. A transaction at that price would leave RCAP with $150 million in debt and $300 million against business units that generated just $28 million in second quarter EBITDA, or earnings before interest, taxes, depreciation and amortization, Mr. Katz noted.
At about $1.15 a share, RCAP's share price has declined 91% for the year. The company has been struggling since it was revealed a year ago that another company Mr. Schorsch controlled, American Realty Capital Properties Inc., now named Vereit Inc., had intentionally not reported a $23 million accounting error over the first half of last year.
RCAP recently has been raising capital and cutting costs. In August, it said it was
selling its wholesale business, Realty Capital Securities, for $25 million to private equity manager Apollo Global Management. Cetera Financial Group is also cutting staff and eliminating its current team of due diligence analysts and replacing them with another group it controls, SK Research.
(More: RCS Capital cuts due diligence team at Cetera Financial)
RCAP spokesman Andrew Backman declined to comment on the Bloomberg report. Instead, he said in an email that “the board of directors of RCS Capital is exploring options to raise significant capital to rationalize the RCS capital structure.
“These efforts are focused on positioning the business for growth and long-term value creation for all stakeholders supported by Cetera's market-leading position,” he wrote. “The company has engaged Lazard in connection with these efforts.”
