Tilney Bestinvest this week ended months of speculation by swooping on Towry in a £600 million deal, but analysts are split on whether it overpaid for its rival.
For some this appears to be a high price for a business which produced £4.4 million profit in 2014 on revenues of £91.3 million. Others have argued that Towry’s evolution over the years into a £9.1 billion wealth management firm warrants a premium.
What is certain is that there are plenty of high profile Towry shareholders who will be very happy with the price achieved.
‘Tilney is paying £600 million for £9 billion of AUM, making the valuation extremely attractive for Towry shareholders,’ said Peter Lenardos, managing director of RBC Capital Markets.
Besides Towry’s private equity parent, Palamon, and its current board, there are a number of past executives who will get to cash in the shares they have held on to.
The big winners
Towry was owned by a Jersey registered company, TL Jerseyco Holdco, which had multiple share classes.
According to the list of shareholders on 1 January, Palamon owned the majority of shares in Towry with 58,985,000. These are held through a Jersey-registered limited partnership called Coleherne Holdings.
Towry chief executive Rob Devey, who is set to depart once the deal completes, owns nine million C ordinary shares, as well as 5,000 D shares.
Devey’s predecessor, Andrew Fisher, who stepped down as
CEO after eight years in April 2014, owns 8.9 million ordinary shares. In addition, he holds 4.8 million B shares.
Meanwhile, Ron Sandler, who was appointed a non-executive director on 28 March 2014 holds half as much as Devey with 4.5 million C ordinary shares, according to the filing.
Another former chief executive, Toby Strauss, who headed what was then John Scott & Partners between 2003 and 2005, still holds 4.1 million shares.
Added to this, Andrew Wilson, head of investment, who joined the firm in 1994, has 97,975 ordinary shares and 20,000 B shares.
The price is right?
Analysts say that Tilney Bestinvest will be looking to drive significant cost savings through combining the groups in order to get on its way to recouping the £600 million price paid for Towry.
‘In order to justify this high a price, which equates to nearly 7% of AUM, Tilney must be betting on significant cost synergies,’ Lenardos said. ‘This deal makes listed wealth managers, such as Brewin Dolphin, look like a bargain.’
However, Kevin Pakenham of Pakenham Partners, argues that the price paid does not look out of kilter with the current trend in valuations and he would not deem it ‘expensive’.
He suggests that the business has been valued on a multiple of revenues due to its nature as a consolidating transaction.
‘The two businesses have a reasonably similar wealth management model. They would fit together quite well,’ he said.
‘There will be substantial cost savings from the consolidation and it seems to be the most natural acquirer. Also, they were both businesses backed by private equity firms, which is an indication that private equity firms bring considerable management contribution to these businesses.’
Scorpio Partnership’s annual global M&A report last month showed that the average price of wealth management business purchases rose by 50% last year with average deal valuations rose from 2.06% to 2.14% of AUM.
Last year, Towry itself felt the need to increase its offer for Ashcourt Rowan by £23 million at the eleventh hour. It ended up paying £120 million, up from the previously agreed £97 million for the firm, a 97.9% premium to Ashcourt’s share price on the day of the initial announcement.
When Towry was put up for sale in December last year, Sebastian Dovey, managing partner at Scorpio Partnership said that it would come down to valuation.
‘Some institutions have found their achievements difficult to deal with. Indeed, the positioning of Towry over the years has often polarised market opinion,’ he said. ‘Whatever the market may think, the business has achieved some significant milestones.’
So what next for the combined group?
One obvious way to reduce costs will be through redundancies where roles are duplicated, such as in certain back office functions, and to consolidate regional offices.
A Tilney Bestinvest spokesperson said no decision on office closures has yet been made, but said there are a number of locations where there are overlaps.
Pakenham argues that during the integration of the businesses, the companies will use common sense to determine which regional offices contribute more.
‘If a local office is profitable and has a strong client following, there is a tendency to keep the office.’