Private equity may be the last, best hope for Regions Financial Corp. in finding a buyer for Morgan Keegan & Co. Inc.
A consortium of private-equity buyers, including The
Blackstone Group LP,
The Carlyle Group and Thomas H. Lee Partners, are finalists in the bidding for the broker-dealer, which Regions put on the block in June, according to Reuters.
A spokeswoman for Regions declined to comment on the status of Morgan Keegan.
The potential strategic buyers — a partial list reportedly includes
Raymond James Financial Inc., RBC Capital Markets LLC,
Stifel Financial Corp. and
Wells Fargo Advisors — seem to be long shots now. For openers, share prices have fallen for publicly traded companies that might be interested in Morgan Keegan, making a stock-based deal more expensive.
The cost of borrowing money has gone up for these companies, as well, and other brokerage firms would have to consider the overlap of operations with a merger.
RAYMOND JAMES WARY
Raymond James chief operating officer Chet Helck, for example, recently said that Morgan Keegan's retail-brokerage business is a great “strategic fit” for his firm but that there is significant overlap between the fixed-income trading and underwriting businesses of the two firms.
“You have to justify the price you're willing to pay, considering those costs, too,” he said.
Recruiters said that the advisers are deeply loyal to the Morgan Keegan brand and would stay if they felt the firm's culture remained intact. That would include keeping their Memphis, Tenn., headquarters, and most of their branch offices and regional managers.
Although very few advisers have left the firm so far, many are determined to avoid the aches and pains of a merger, and apparently have plotted their exit strategies. They will bolt if they don't like the buyer, recruiters said.
“From what we've heard, a private-equity buyer is more likely,” said Marty Mosby, an analyst with Guggenheim Securities LLC.
The trio of Blackstone, Carlyle and Thomas H. Lee Partners would certainly fit the bill.
They are big enough to do the deal, and could share the risk if the brokerage business went into a multiyear decline, not unimaginable given the economic and market uncertainty. A private-equity firm could expect to have a better environment to sell or spin off the business within a few years, even if things worsen in the short term.
Morgan Keegan advisers probably would be happiest with that scenario. Ideally, the deep-pocketed trio will offer decent retention packages and take a hands-off approach.
Price is the issue. Regions is one of the last large-cap banks still to owe Troubled Asset Relief Program money — $3.5 billion in total.
In a presentation last month, Grayson Hall, Regions' CEO, said: “Our position on TARP repayment remains unchanged. Our preference continues to be to execute in as shareholder-friendly a manner as possible.”
Still, the longer the TARP situation lingers, the worse it looks for the bank. While there is no deadline for repaying the money, Regions is paying 5% interest on the preferred securities held by the U.S. government. And the interest rate bumps up to 9% toward the end of next year.
That isn't exactly cheap financing, considering what interest rates are like right now.
The sale of Morgan Keegan was intended to cover a substantial part of the TARP bill. And with Regions' stock price now in the tank, it looks all the more important.
The stock is down nearly 50% this year, in part because the bank's largest shareholder — Bruce Berkowitz of Fairholme Capital Management LLC — unloaded half of his 123.9 million shares in Regions during the past quarter.
Regions reportedly was expecting at least $1 billion for the firm when it put it up for sale in June.
Now volatile markets have hurt the outlook for the brokerage industry and increased the risks for a potential buyer.
If the bank isn't a distressed seller, it is clearly negotiating from a weakened position. And private-equity firms prey on weakness.
Regions may be lucky to get the $789 million it paid for the firm back in 2001.
Mr. Mosby suggested that the bank may have to take what it can get. Shelving the planned sale of Morgan Keegan would likely be disastrous for morale at the broker-dealer.
“People were told, "You're not part of our plans,'” he said. “They can't undo that.”
Email Andrew Osterland at [email protected]
