Penson Worldwide Inc. said today that it closed its acquisition of “substantially all” of the correspondent clearing accounts of Ridge Clearing & Outsourcing Solutions for $35.2 million in stock and debt, or about half the $60 million to $70 million estimate Penson made when announcing the planned purchase last year.
The deal adds about 100 Ridge clients to Penson's base of 297 brokerage firms, making it the second largest correspondent clearing firm in the securities industry.
Broadridge Financial Solutions, Ridge Clearing's parent, received 2.5 million shares of Penson common stock, giving it a 9.5% ownership stake in the company. It also holds a $20.6 million, five-year seller-financed note, which is paying 6% interest. Penson could pay an additional amount in 2011, based primarily on results of some recently signed Ridge correspondents that are not yet generating revenue.
“I like the deal,” said Mark Lane, an analyst at
William Blair & Co., which has an “outperform” rating on Penson. “Strategically it gives Penson much greater market presence, the ability to benefit from increasing scale and much more diversification.”
Penson's client base had been centered on direct-access active professional trading firms while Ridge has a more traditional base of retail brokerage firms, he said.
As part of the deal, Penson signed an 11-year contract with
Broadridge to outsource securities processing and related services at a cost that it should save it between $7 million to $10 million annually in outside vendor costs when fully implemented. Penson expects to convert its Canadian clearing operation to the
Broadridge platform in the fourth quarter of this year, with its U.S. and U.K. clearing operations to follow in 2011.
“The outsourcing agreement is economically more attractive than the transaction itself,” said Mr. Lane, who noted that Penson's stock is trading well below the value of shares used in the transaction. Penson stock closed Friday at $5.95 a share, while the transaction was based on a 90-day weighted average value of $8.38 a share.
While
Broadridge negotiated terms to offset the decline in Penson's stock value, Penson gave itself options in light of declining anticipated revenue from Ridge clients related to broad industry trends tied to lower interest rates and some specific situations. Among the latter was the decision of
Neuberger Berman Group LLC, an asset management firm that was one of Ridge's biggest accounts, to move its approximately 50,000 clearing and custody client accounts to J.P. Morgan Clearing Corp., and the crash of GunnAllen Financial Inc., an independent broker-dealer that was closed by regulators in March.
In a statement, Penson said it and
Broadridge agreed to revise some terms of the original deal, “including finalizing the list of correspondent contracts to be acquired, agreeing on certain terms of the contracts signed at closing and deferring the delivery of certain agreements pending further discussions.”
Broker-dealers and their clients are generally reluctant to change their clearing firms because of the need to adjust to new processes, customer statements and loan agreements. However, Penson said that its outsoucing arrangement with
Broadridge means that for Ridge clients “it initially will be business as usual, although over the coming months we anticipate offering additional products and services, including access to portfolio margin, futures, and foreign exchange products, and providing enhanced execution services.”
Penson said that in spite of uncertainty over trading volume and expectations that margin and other interest-based revenue will remain low in the immediate future, it expects the purchase to slightly increase the value of its shares in the first 12 months of ownership “and more so in its second year.”
It estimates it will glean about $50 million in net revenue from the former Ridge clients in the first year — adjusted from a range of $50-$60 million it gave in early May — but said earnings before interest, taxes, depreciation and amortization from the new accounts should be about $13 million, tweaked upward from the $12.6 million estimate it made last month.
Penson said the new Ridge clients added about $500 million in interest-earning customer balances when the deal closed on Friday.
“All stocks with earnings that are sensitive to short-term interest rates have been weak the last four six weeks because expectations for rate rises [by the Federal Reserve] have been pushed out,” said Mr. Lane, the
William Blair analyst.
