Morgan Keegan & Co. Inc. won a small victory last week when a class action brought by investors in a Tennessee state court was dismissed by a federal judge. But it doesn't look as if the troubled securities firm is any closer to being sold than when its parent company, Regions Financial Corp., put it up for sale three months ago.
It doesn't help that the brokerage firm is still facing two other class actions in federal court, as well as other litigation from private investors who lost money in Morgan Keegan mutual funds holding mortgage-backed securities when the housing market collapsed.
But it's not the uncertain liability hanging over the firm that is holding up a deal. More than likely, Regions — which already has coughed up $210 million to settle federal and state regulatory charges related to the mutual funds — also will cover any future costs from the scandal, as Ameriprise Financial Inc. did when it recently sold Securities America Inc. to Ladenburg Thalmann & Co. Inc.
THE MARKETS
The problem is the markets.
“A lot has happened since June,” said Marty Mosby, an analyst with Guggenheim Securities LLC. “Potential buyers likely have changed their perception of what the firm is worth and whether they want to undertake a big transaction in an environment like this.”
Still owing the government as much as $3.5 billion in Troubled Asset Relief Program money, Regions hired The Goldman Sachs Group Inc. to find a buyer and hoped for a price of at least $1 billion. Regions purchased Morgan Keegan in 2001 for $789 million.
Initial bids fell short of Regions' expectations, however, and it has been reported that a date has been set for a second round of bidding. Regions chief executive Grayson Hall gave no update on the status of Morgan Keegan when he spoke at a Barclays Capital conference in New York last Monday.
A Regions spokeswoman, Evelyn Mitchell, declined to comment on the status of the Morgan Keegan sale.
Mr. Mosby suggested that the bank could expect a price of between 0.75 and 1.5 times revenue. While Regions does not break out Morgan Keegan's performance, Mr. Mosby said the firm has had revenue in the range of $1 billion over the last three years, putting a possible sale price between $750 million and $1.5 billion.
“A deal would likely be on the lower end of that valuation now, given the markets,” he said.
Complicating the deal, and whom it is most likely to involve, is how the more than 1,200 Morgan Keegan financial advisers — the firm's biggest asset — will react to a new owner. So far, virtually none of the advisers have left the firm, according to recruiters, who nevertheless continue to call them regularly.
“Almost to a man, the advisers are waiting for management to do the right thing,” said Tim White, managing partner at recruiting firm Kaye/Bassman International Corp. “Hopefully, they won't be disappointed.”
The best-case scenario from the advisers' point of view, said Bobby Allison, president of The Allison Group, a recruiting firm, would be for a private-equity firm or group of firms to buy the broker — something along the lines of Lightyear Capital LLC's purchase last year of three brokerages from ING Groep NV to form Cetera Financial Group.
Some of the larger private-equity firms that could execute the deal, such as the Carlyle Group and The
Blackstone Group LP, have been mentioned as possible suitors.
“The retail business is worth a lot, but the buyer is going to have to pay twice,” Mr. Allison said. “They'll have to pay Regions and then they'll have to pay the advisers to keep them in their seats.”
CAN A BUYER KEEP STARS?
The brokerage firms most often cited as possible buyers — Wells Fargo Advisors LLC,
Stifel Financial Corp, Raymond James Financial Inc. and RBC Capital Markets LLC — also have to consider how successful any kind of retention package would be with the firm's biggest producers. All of them likely would look to consolidate infrastructure and possibly abandon the firm's Memphis headquarters. And according to recruiters, that would not go over well with the advisers.
“If the buyer is not a private-equity firm, I think some of the regional and branch managers will start up new organizations and try to recruit advisers,” Mr. White said.
Unfortunately for Regions, time is not on its side. “If this lingers past six months, you get to a point where the uncertainty erodes the inertia, and advisers start making decisions to leave,” Mr. Mosby said.
Email Andrew Osterland at [email protected]
