There was a flurry of excitement on 4 April as the Brewin Dolphin share price shot up by 6%. It was the day of the juicy £600 million bid for Towry Law.
While Brewin was scaling the heights other quoted wealth managers such as Rathbones, Brooks Macdonald and Charles Stanley were down on the day. Was the market saying ‘Brewin could be the next takeover?’
In actual fact the truth was more prosaic. The most likely cause of the spike was a positive note from broker N+1 Singer, which upgraded its rating on Brewin from 'hold' to 'buy'.
The broker felt Brewin, which has lost 15% of its value since the turn of the year, is trading at an unjustifiably depressed price level against two of its key rivals, Rathbones and Brooks Macdonald - at around a 25% discount.
N+1 analyst Andrew Watson considers this to be especially surprising, given the resilience of Brewin’s fund flows. ‘Brewin has a track record of delivering net inflows irrespective of market volatility,’ he said. ‘AuM stability/growth will help to deliver margin accretion.'
Such dynamics are bound to be of interest to potential predators. While we are not suggesting a Brewin takeover is imminent, it is useful to look at the pros and cons as to whether Brewin could be a top takeover target.
The case for
Over the last few years, Brewin has been streamlining its business and it is now a far more attractive proposition.
The firm launched a strategic three-year plan under its then chair Jamie Matheson (pictured below) at the end of 2011, who famously said he wanted to make the firm ‘fitter’.
He unveiled the review on the back of a tough 12 months for Brewin, which saw pre-tax profit fall by 27%. The firm had employed an aggressive regional strategy, which saw it open a new branch in Bristol and add to its teams in Glasgow, Leeds and London.
'It will take three years to achieve maximum benefits for shareholders, by which time we intend to have increased our operating margin to over 20%,’ Matheson said. The margin stood at 15% at the time.
In March 2013, Matheson stepped down and the firm promoted non-executive director David Nicol (pictured) to chief executive.
A qualified accountant, Nicol built his reputation as a disciplined manager during a 27-year stint at Morgan Stanley, where he held a number of operational roles. Unlike the former stockbroker Matheson he did not have broking in his blood. Could he be the man to streamline and re-focus Brewin for a change of ownership?
Nicol has since refocused Brewin, resulting in the closure of a number of regional offices and the sale of its execution-only business, Stocktrade, to Alliance Trust. Brewin also took a £32 million hit on an ill-fated technology project.
Brewin’s 2015 results showed the business is now in much better shape than it was four years ago, with the margin hitting 21.9%. Profit rose 7% over the years, while assets under management stood at £32 billion.
‘The management team has focused efforts on rationalising and improving infrastructure, and internal processes. There is now increasing emphasis on how Brewin will look to grow AUM over the medium term. Progress has been made to date and we hope to see further margin accretion,’ Watson said.
Additionally, a prospective buyer could be attracted by the firm's revenue potential.
Panmure Gordon’s Jeremy Grime, who believes Brewin could receive a bid at some point, outlines the appeal.
'Brewin would be attractive [to bidders] because it is changing from a story of margin enhancement to top-line revenue growth,' Grime told Wealth Manager.
He points out that the firm has separated its financial planning arm in its accounts, illustrating where the growth in the business is coming from. However, he questions whether Brewin can grow this division - which currently only makes up 6% of the company’s turnover - at a good pace.
‘Brewin are attempting to develop this [financial planning] growth, but predators may be able to do it more quickly for them,’ Grime suggested.
There is a possibility that Brewin could appeal to a large insurance company looking to broaden its business following the UK savings revolution, triggered by chancellor George Osborne’s shock decision to scrap the requirement to buy annuities in his March 2014 Budget. Or an international financial service group looking to build its European presence might be tempted.
Wealth managers are seen as more attractive because of their exposure to the aging population, which now has much more control over their retirement savings.
‘We had been positive on the space as industry dynamics are improving thanks to consolidation and IFAs leaving the sector, and regulation, which pushed up fixed costs for the industry, giving a further advantage to larger wealth managers,’ Wright said at the time.
'[Brewin Dolphin] also benefits from internal change as a new management team focus on cutting costs and raising margins closer to those of peers.’
Insurers have been behind some big deals in recent years, with Old Mutual’s £585 million buy of Quilter Cheviot the standout in February 2015.
Standard Life has also been making inroads in the market, buying the wealth arm of the Skipton at the start of 2015. The insurer’s national advice service, 1825, has also made a series of acquisitions this year. If the insurance giant bought Brewin, it would certainly be making a big statement.
Grime has not ruled out a Standard Life bid for Brewin. ‘Standard Life has built a wealth management arm and may be interested in [launching] a bid,’ Grime said.
Brewin's relatively cheap valuation could also pique the interest of bidders.
Despite its recent decent progress, the shares trade at around a 25% discount to the peer group, according to N+1’s note.
Over the last 12 months, Brewin's shares have lost around 15%, while one of its closest rivals, Rathbones is down by only 5%. Other wealth firm's share prices have also fared better, with St James's Place down by 4%, while Brooks Macdonald and Hargreaves Lansdown have risen by 20% and 14%, respectively.
Only shares in Charles Stanley, which itself is going through a major strategic overhaul, have done worse than Brewin over the last year, down 23%.
At the same time, it is this disappointing share price return, which suggests there is not a bid around the corner for Brewin.
Usually, when bid speculation hits a stock, its share price rises sharply, but in Brewin’s case, this has just not happened. In fact, the price was subject to a bout of profit-taking following the boost from the N+1 note on 4 April.
Perhaps another strong indicator that Brewin is not a bid target is Wright’s (pictured above) recent disposal of stock.
Wright, who is the largest shareholder in Brewin through his Fidelity Special Situations, Special Values and UK Smaller Companies funds, sold around 1.2 million shares at the end of March, cutting his stake to 5.9%. Surely if Wright saw some substance in the speculation, he would not be selling down his stake.
However, other big investors have been buying shares over the last six months, including Henderson Global Investors and JO Hambro Capital Management, which have bought 8 million and 1.7 million shares through their Cautious Managed and UK Equity Income funds, respectively.
Some see Nicol’s overhaul of the business as a sign he is clearing the decks for a suitor. However, it should be noted that Nicol is not a man with a history in M&A and recent rhetoric suggests the firm is back in organic growth mode after years of streamlining.
In a statement accompanying its latest full-year results, Nicol said: ‘Expansion is now firmly on our agenda and we are in a strong position to take advantage of opportunities’.
In a subsequent Capital Markets Briefing on 22 September, Nicol outlined his bullish ambitions for the company. ‘I have set out a vision to grow into the leading UK provider of discretionary wealth management, delivering a compelling client proposition, rewarding careers and sustainable shareholder returns.’
If Brewin was sold now, it would feel like it was doing so with unfinished business.
Another key driver of consolidation in the wealth sector recently has been private equity. However, Watson does not expect a bid to come from this route.
'Private equity deals so far have tended to focus on the mass affluent market rather than the higher net worth space,' he said.
'The high net worth market is more competitive, with a number of large private banks also competing and so it is not as clear cut for private equity.'
Ultimately, while there are plenty of reasons to see why someone might buy Brewin, at the moment it is hard to find a natural strategic fit.
'Brewin could prove attractive to another wealth manager looking for scale and a recognisable brand in the UK HNW space, however, there is no reason to believe that an approach is likely,' Watson concludes.
Brewin Dolphin declined to comment on the speculation