Penson Worldwide to buy Broadridge clearing business

As part of the deal, broker inks 10-year outsourcing contract

Nov 8, 2009 @ 12:01 am

By Jed Horowitz

Broadridge Financial Solutions Inc., the brokerage services firm spun off by Automatic Data Processing Inc., is selling its securities clearing business to Penson Worldwide Inc. and its Penson Financial Services Inc. subsidiary.

The transaction will free up $180 million to $200 million from Broadridge's clearing budget, which it plans to redeploy to its outsourcing and other securities-processing businesses, Broadridge said in a statement. Indeed, Broadridge said, Penson has signed a 10-year outsourcing contract as part of the deal for “selective processing services” for existing Penson clearing clients as well as for Broadridge's clearing clients.

Broadridge said that it will give up about $75 million of revenue from the clearing business and expects to register a one-time loss of $30 million to $35 million related to transaction costs such as elimination of goodwill and intangibles.

However, it will receive between $60 million and $70 million in the form of a five-year subordinated note and shares of Penson common stock. The stock will make up less than one-third of the total sale and won't exceed 9.9% of Penson's total outstanding shares of common stock.

The deal comes as correspondent-clearing firms such as Broadridge, the Pershing LLC unit of The Bank of New York Mellon Corp., and Fidelity Investments' National Financial Services LLC unit search for ways to offset declining sales as a result of consolidation among their clients and an extended slide in the borrowing and trade execution needs of their brokerage clients amid the economic slowdown.

Broadridge, in its 2009 fiscal year, ended June 30, lost certain servicing businesses of Bank of America Corp. as a result of the bank's takeover of Merrill Lynch & Co. Inc.

National Financial also is losing BofA's clearing business as a result of the Merrill deal.

The Penson deal, aimed to beef up Broadridge's service bureau revenue, could bolster the personal wealth of Broadridge executives whose compensation is aligned with hitting sales targets in the firm's various divisions. Although Broadridge hit its sales and earnings goals for its entire clearing and outsourcing solutions division in fiscal-year 2009, outsourcing sales fell below the bonus goal minimum, according to the company's proxy filing with the Securities and Exchange Commission last month.

Broadridge also said that Morgan Stanley Smith Barney LLC recently signed a seven-year contract expected to generate more than $35 million of revenue for providing account statements, performance reports, tax-reporting documents and other customer communications and trade-reporting services. The firm had lost Morgan Stanley as a client after it was spun off from ADP in April 2007.

Broadridge chief executive Richard Daly said during a conference call with analysts Tuesday that its prospering investor communications unit helped combat weaknesses in its processing and clearing/outsourcing businesses. Those units continued to be affected negatively by low margins and concession agreements from the firm's 2009 fiscal year.

Mr. Daly also said that Broadridge is increasing its business among mutual fund clients even as its role among broker-dealers is diminishing as it leaves the clearing business, which involves lending and back-office processing for small brokerage firms.

“We no longer need to operate a traditional clearing business,” he said, adding that it doesn't fit in with the firm's core activities and will position Broadridge as “a pure technology play” for investors. Mr. Daly and Dan Sheldon, Broadridge's chief financial officer, said that the sale of the clearing business eliminates balance sheet risk and regulatory capital requirements related to margin lending and other clearing activities.

As part of the planned deal, expected to close in the first half of calendar year 2010, Broadridge may lend Penson up to $50 million to meet its greater capital requirements,

The outsourcing deal with Penson will supplement Broadridge's outsourcing sales revenue of about $25 million annually, executives said during the call with analysts.

It also should give Broadridge another leg up over Fidelity's NFS, which for more than a year has been trying to land data-processing and other servicing contracts with large broker-dealers but hasn't yet signed an outsourcing client.

Broadridge also said that its fiscal-2010 first-quarter earnings fell 26% to $26.4 million, from $35.6 million a year earlier, as a result of both lower overall revenue and a one-time gain of $125 million in the previous year's quarter related to the buyback of some debt. The firm's per-share earnings for the 2010 quarter fell to 19 cents, from 25 cents a year earlier.

Broadridge's closed sales of $30.7 million in the quarter were $2.2 million below the previous year's quarter.

E-mail Jed Horowitz at


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