One of Britain’s largest merchant banks sells its wealth management division for up to £200m to strengthen its balance sheet in preparation for possible regulatory action against its motor finance business.
Close Brothers, an American private equity company, will receive £172m in cash up front after it announced on Thursday that they had agreed to sell their asset management division. The proceeds will be used to increase its core capital buffers by approximately 100 basis points.
Close Brothers is bolstering their finances after the Financial Conduct Authority began a comprehensive review of the motor loan industry in January. The merchant bank has been operating in this market for over three decades.
Investors have been frightened by the possibility of a penalty or compensation bill. This has caused its share price to fall more than a quarter this year. Close Brothers tried to calm investors’ fears by announcing a goal to increase its capital position by approximately £400 million in March. Close Brothers has already reduced its lending and cut back on dividends, but now the sale of its wealth business, internally codenamed Titan, will bring it even closer to this target.
It has been a long time coming. Last year, before Close Brothers’ regulator inquiry was launched, it was revealed that the group was evaluating options for its wealth management. However, a deal did not happen. A deal was rumored to have valued Close Brothers, which manages assets worth £20.4 billion at around £300 million.
Analysts from Keefe, Bruyette & Woods, a broker, stated that the price of up to £200m agreed with Oaktree, including a contingent deferred payment of £28m in preference shares, is “at the lower end of expectations”.
Mike Morgan, Close Brothers’ finance chief, has denied that the regulator’s investigation had affected the sale. The transaction is expected to be completed early next year.
He said: “I don’t think we are forced sellers of it in any way.” “I am very happy with the price we got for it.”
Close Brothers will now focus on its core business of banking and Winterflood – a market maker for UK equity. The group was founded in 1878 and initially focused on investing in American farms. Today, it has a £10.1billion loan book, and offers everything from small business financing to financing for boats and aircraft.
Close Brothers has a large exposure to motor finance, which accounts for around £2 billion in outstanding loans. Close Brothers is headed by its chief executive Adrian Sainsbury. However, the group announced on Monday that Sainsbury had taken a temporary medical leave, and that his primary responsibilities were transferred to Morgan.
The FCA shocked the motor finance sector when it announced that it would be reviewing all car loans between April 2007 to January 2021. This was the time when the regulator banned the discretionary commissions. In July, it warned that “the possibility of forcing firms to compensate their customers is more likely than when we began our review”.
The FCA review could cost the banking industry billions of pounds. Lloyds Banking Group set aside £450,000,000 for the possible costs and compensation.
Close Brothers, who has not made a provision like Lloyds, revealed in its annual report on Thursday that the company had incurred costs of £6,9 million in dealing with customer complaints and an inquiry by the regulator. Close Brothers also expects to incur costs between £10 and £15 millions next year.
Close Brothers will be in a state of uncertainty for months to come, as the FCA set a May deadline to inform the market of its findings. Morgan said that the FCA needed more time to finish its review due to the complexity of the subject, but added: “Naturally, it casts a shadow on the sector.”
Close Brothers’ operating profit before tax grew by 27 percent in the year to July. The shares of Close Brothers were down 29 1/2p or 5.6% at 498p by the end of Thursday, due to disappointment over its 2025 guidance.
Some in the City wonder if the Winterflood division of the merchant bank will be sold next.
The market maker is well-known in the Square Mile. It was founded in 1988 by Brian Winterflood. He was a leading figure in equities and played a major role in founding the Unlisted Securities Market in 1980, which led to the London junior Aim Market.
Close Brothers purchased Winterflood back in 1993. The business has become a leader in providing liquidity in UK equity. It has been under pressure due to low trading volumes. The average daily trades for the year to July 31 fell by 8 percent on an annual basis to 55,000. Winterflood has suffered a £1.7m operating loss due to these tough conditions.
Analysts at Panmure Liberum said that there are no synergies with Close Brothers’ core business. With the sale of Close Brothers’ asset management division, “the ownership Winterflood appears to be anachronistic”, they added. They suggested that Winterflood be sold “if a purchaser can be found”.
When asked if a sale was imminent, Mike Morgan, finance chief at Close Brothers, replied: “I think a lot people will look at Winterflood, and see it as a fantastic business, just like we do. But I won’t speculate on what may or may not happen.”
He admitted that there was “very little” overlap in the banking division of the group and Winterflood. “I could flip that around and say that there is very little participation from me running that business. It’s standalone and it is very, very low on capital requirements. In history, it has always paid out good dividends, so it is a successful arrangement.”
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