Still no sign of buyer for Morgan Keegan

Dec 11, 2011 @ 12:01 am

By Andrew Osterland

The 1,200 or so Morgan Keegan financial advisers waiting to see what kind of acquirer parent Regions Financial can find for the broker may get a lump of coal in their stockings this Christmas.

Between the volatile markets, the uncertain liability remaining from the firm's risky bets on subprime-mortgage-backed securities, and the fallout from the collapse of MF Global Holdings Ltd., chances that Regions Financial Corp. will be able to find a buyer for Morgan Keegan & Co Inc. look increasingly slim.

In fact, it may not be Morgan Keegan that is sold now but Regions Financial itself, said Marty Mosby, a bank analyst with Guggenheim Securities LLC.

“If a deal for Morgan Keegan falls through, Regions will come under even more pressure,” he said. “They may reconsider their overall strategy and whether they need a partner for the whole company.”

REAL ESTATE EXPOSURE

Regions had enormous exposure to the real estate markets in Florida, Georgia and other Southeastern markets that were hammered when the housing bubble collapsed. It remains one of the last major financial institutions that owes the federal government money under the Troubled Asset Relief Program.

The bank is paying 5% interest on the $3.5 billion balance, and it will jump to 9% if it isn't paid off before the end of next year.

The sale of Morgan Keegan — Regions hired The Goldman Sachs Group Inc. in June to shop the firm — was supposed to bring it at least a little closer toward repaying the government.

“It seemed like an easy path when they announced their intentions last June, but then the world turned upside down,” Mr. Mosby said.

Grayson Hall, chief executive of Regions, remains optimistic.

“We'll conclude a transaction only if we can do so on a basis that provides sufficient benefits for Regions in terms of our capital, liquidity and overall risk profile,” he told analysts at Goldman's U.S. Financial Services conference Dec. 6.

The bar for success may have to be lowered substantially. When the process began in June, Regions, which paid $789 million for the firm 10 years ago, reportedly was asking at least $1 billion.

The preferred buyers from both the bank's and the advisers' point of view, were private-equity firms. They wouldn't be in competition with Regions and would likely leave most of the firm's infrastructure — including the Memphis, Tenn., headquarters employing more than 1,000 people, intact.

The negotiations dragged on through the summer, with the volatile markets not helping matters. After MF Global declared bankruptcy at the end of October, Thomas H. Lee Partners LP and Aquiline Capital Partners LLC reportedly lowered their bids to $750 million, according to anonymous sources who spoke to Bloomberg News.

The other team bidding — The Carlyle Group LP and The Blackstone Group LP, dropped their offer even further.

Exit the private-equity firms and enter the strategic buyers.

Topping the list is Stifel Financial Corp., which has acquired multiple firms over the last several years. Wells Fargo & Co. has also been mentioned as a potential buyer.

Stifel Financial spokeswoman Sarah Anderson didn't return calls seeking comment.

Wells Fargo spokeswoman Erica Van Ross declined to comment.

SOME HURDLES

One problem is that the strategic buyers aren't interested in the institutional fixed-income side of Morgan Keegan's business. The firm is a large underwriter of municipal bonds.

Clouding the situation further is the uncertain liability remaining from huge losses by three mutual funds and four closed-end funds that invested in subprime-mortgage-backed securities. According to regulators, 39,000 investors lost $1.5 billion.

Regions paid $210 million to settle federal and state regulatory charges in June — the same day it announced its intention to sell Morgan Keegan. But it still faces class actions and individual claims against the company.

“Class actions can settle for 10 to 20 cents on the dollar,” said Tom Ajamie, managing partner of law firm Ajamie LLP. “However, if the liability facts are strong, the settlement could be much larger, and if it goes to trial, a jury could award the full $1.5 billion.”

From the advisers' point of view, Stifel would be preferable to Wells Fargo, which would likely close scores of Morgan Keegan offices and scrap the headquarters entirely. Many think that Regions itself will close down the Memphis operations if it doesn't find a buyer.

Either way, the advisers are heading for some significant changes whether a deal happens or not. And impatient recruiters, who have managed to move only about 15 brokers out of the firm, are pushing them to consider alternatives more seriously.

“I admire the loyalty, but Morgan Keegan is circling the drain,” said Ron Edde, a recruiter with Armstrong Financial Group Inc., who said that he has spoken with more than 30 Morgan Keegan brokers about other job opportunities.

aosterland@investmentnews.com

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