A group of Speirs and Jeffrey directors are in line for a bumper reward after Rathbones struck a £104 million deal to by the business earlier this month.
Speirs & Jeffrey is a privately owned business. While there are 10 directors running the business, a look through the shareholder register reveals that only eight will be getting a payday (see chart).
THE SPEIRS & JEFFREY DIRECTORS SET FOR A PAYDAY (Source: Fame by Bureau van Dijk)
|Name||N° of shares held||Total value (GBP)||% of controlling interest|
|MR ANDREW ALAN WALLACE WADDELL||10,501||10,501.00||15.37|
|MR MICHAEL JAMES WILSON||10,501||10,501.00||15.37|
|MR RUSSELL LANG CRICHTON||10,501||10,501.00||15.37|
|MR THOMAS MUIRHEAD BIRNIE BROWN||6,147||6,147.00||9.00|
|MR CRAIG CHARLES BAXTER||3,415||3,415.00||5.00|
The Waddell family is the main beneficiary from the deal. Graham and Andrew Waddell are the third generation within Speirs & Jeffrey, which has a history going back 112 years.
The pair hold a combined 32.87% of shares, netting them £34 million.
Meanwhile, Graeme Dickie, Michael Wilson and Russell Crichton – who will become head of Rathbones’ Scottish business – each hold 15.37% of shares, therefore gaining an initial £16 million from the deal.
Did Rathbones pay over the odds?
On paper, Rathbones’ acquisition of Speirs & Jeffrey looks tantalising.
The deal will see Rathbones become the biggest wealth manager in Scotland and broaden its reach in one of the UK’s most competitive markets.
The acquisition consists of an initial payment of £104 million, but depending on hitting certain targets, this could reach £249 million, which looks expensive to Shore Capital analyst Paul McGinnis.
Before getting into the figures, there are a few things to keep in mind about the deal.
First is that the majority, some 60% of the £6.7 billion total, of Speirs & Jeffrey’s assets are in advisory and execution-only rather than discretionary. Rathbones, led by chief executive Philip Howell (pictured), will be looking to convert these clients to higher yielding discretionary.
Second, is that it will be unlikely that Rathbones pays the maximum amount in the end. As McGinnis points out, achieving the top end of its target range by the end of year three will be quite a challenge.
So, what do the numbers say?
According to Speirs & Jeffrey’s unaudited accounts for the year to 10 May, the company generated revenue of £28 million, up 11% year-on-year. Underlying profit before tax was up 16% to £10.6 million, which McGinnis says gives it a healthy pre-tax profit margin of 38%.
Following the deal, Rathbones expects to achieve £6 million in annual cost savings by year three, although this is expected to incur a one-off hit of £3 million. Achieving this would add £13 million of post-tax profit to Rathbones in 2021.
However, McGinnis is sceptical, noting that a lot of the uplift Rathbones expects from the deal will come from converting Spiers & Jeffrey’s assets under management (AUM) from advisory to discretionary.
‘Obviously Speirs could have done this even without the deal, but for me that stretches credibility to think it could raise margins even higher than the 38% just reported without investing more in the business (as opposed to stripping out £6 million!)’
Drilling into the numbers, he highlighted: ‘Rathbones is seeking to generate £6 million of cost synergies by the third full year following completion (2021) at a cost of £3 million. If we tax these synergies at 20% and add them to the Speirs & Jeffrey May 2018 post tax profit of £8.2 million then the deal would (pro forma) add £13 million of post-tax profit to Rathbones’ 2021 earnings.
‘At the initial consideration (plus the near term £15 million contingent payment to allow these synergies and the £3 million cost to deliver them) this would be a post-tax return on investment of 10.6% (£13 million/£122 million).’
On that basis he says the deal seems expensive with ‘any value creating some years away’.
On the other hand, Peel Hunt’s Stuart Duncan has said that while the board expects the total paid to be ‘materially lower’, the initial consideration of 1.6% of AUM looks an attractive price for Speirs & Jeffrey.
He noted: ‘Rathbones has shown in the past the ability to extract value from smaller bolt-on type deals, and we believe that today’s deal will prove likewise in the coming years. Importantly, Speirs & Jeffrey fits culturally with Rathbones and the deal meets the financial criteria for any deal.
‘Any acquisition carries a degree of risk, but Rathbones’ management has the experience, backed by the strength of the operating infrastructure, to realise the full potential from the Speirs & Jeffrey business.’
Duncan added: ‘Speirs & Jeffrey was owned by a relatively small number of individuals, although all will join Rathbones on acquisition. As in any relationship business, there is some risk that the loss of any investment manager would lead to some degree of asset attrition. As mitigation, over half the potential total consideration is deferred and subject to continued employment in the business, as well as the delivering of synergies and discretionary fund growth.’