Purchase price falls for Broadridge unit

Recent setbacks to Broadridge Financial Solutions Inc.'s Ridge business have driven down the price of the clearing unit's impending sale to Penson Financial Services Inc.

Recent setbacks to Broadridge Financial Solutions Inc.’s Ridge business have driven down the price of the clearing unit’s impending sale to Penson Financial Services Inc.

The deal, which will make Penson the nation’s second-largest clearing firm when it closes next quarter, is valued at $45 million to $54 million, down from $60 million to $70 million when it was first announced in November.

Neuberger Berman Group LLC — one of Broadridge’s biggest clients — said recently that it was jumping to a rival clearing firm. Meanwhile, regulators last week closed GunnAllen Financial Inc., another client of Ridge (see related story on this page).

The drop in valuation was first disclosed to analysts by Philip Pendergraft, Penson’s chief executive, last month.

“We have spent a good deal of time visiting with Broadridge clients and reviewing their relationships,” he said, explaining that the price of the acquisition is based on a multiple of revenue at the time of the deal’s closing. “Based on our due diligence, we now anticipate that the acquired revenues will run between $50 [million] and $60 million per year,” down from the $75 million that Broadridge collected in its 2009 fiscal year, which ended June 30.

At the time he made those comments, Mr. Pendergraft was aware that Neuberger Berman had decided to move its business as a result of the planned takeover, according to several sources.

Neuberger, a former Lehman Brothers Holdings Inc. money management unit, moved to Ridge after Lehman’s September 2008 bankruptcy. It said March 15 that it will transfer the clearing and custody of its approximately 50,000 client accounts to J.P. Morgan Clearing Corp. next quarter.

It is less clear whether Penson was aware of the problems at GunnAllen, the independent broker-dealer that the Financial Industry Regulatory Authority Inc. shuttered last Monday due to a lack of capital.

Broadridge is now looking to place GunnAllen’s 400 brokers and their clients with other brokerage firms.

“The goal is to give the GunnAllen business to a [Ridge] client that will go to Penson,” said Rick Rodick, treasurer and vice president of investor relations at Broadridge.

He declined to comment on the size of the GunnAllen business but said “other correspondents would love to have GunnAllen’s accounts.”

Both Mr. Rodick and Dan Son, Penson’s president and co-founder, emphasized that the final price of the deal is a moving target.

“When we negotiated and structured the agreement with Broadridge to acquire the Ridge clearing contracts, we had anticipated that it would not include all correspondents,” Mr. Son wrote in an e-mail.

Mr. Pendergraft told analysts that anticipated revenue from Ridge clients has been falling due to “current market conditions,” as well as “to the fact we always knew there would be some correspondents that we would choose not to take, and that some would decide to go elsewhere.”

The deal, which would result in Broadridge’s receiving about 5.8% of Penson’s common stock at the close, was structured so Penson will not be penalized by paying for “correspondents we do not take,” he said.

As part of the deal, Penson has agreed to transfer the back-office processing of its clients’ accounts from three outside vendors to Broadridge, which specializes in shareholder servicing and outsourcing. Broadridge said it will reap about $35 million to $40 million annually from the 10-year deal — a figure Mr. Rodick said has not materially changed since the deal was announced.

That would offset the $30 million to $35 million of transaction costs that Broadridge expects to incur from the deal through writing down goodwill and other intangibles.

Mr. Rodick also said that the developments at Neuberger Berman and GunnAllen haven’t had a material impact on the transaction.

Broadridge plans to deploy more than $180 million of regulatory capital that will be freed up by exiting the clearing business. Though the deal gives Penson the option of borrowing $50 million from Broadridge to support its heavier capital requirements, Penson executives have announced alternative capitalization plans.

The firm recently raised $60 million in five-year, 8% senior convertible notes, expanded its bank credit agreement to $100 million, from $70 million, and expects to issue additional debt to “support Ridge correspondents,” according to a presentation the firm made this month at an investor conference.

Clearing firms process and execute trades for small brokerage firms and their clients, and also serve as bankers by financing margin accounts, lending stock and performing other interest-bearing services. Penson’s client base is focused on online brokers and professional traders that are active traders, as opposed to the more institutional focus of Broadridge.

E-mail Jed Horowitz at [email protected].