When Mifid II was introduced in January last year, the stockbroking industry braced for a wave of consolidation.
The landmark EU legislation forced banks and brokers to charge separately for investment research, rather than bundling it with commissions for executing trades. As predicted, spending on research they provide has tumbled. That has put the business model of smaller brokers under pressure, compounding woes caused by thin trading commissions and a dry spell in the IPO markets.
Industry executives expected brokers to team up to cut regulatory costs and squeeze out savings on their research coverage. Spanish bank Santander explored an acquisition of mid-cap broker Peel Hunt, while Macquarie took a look at Liberum.
But there has been no consolidation tsunami. Senior broking executives say there is little incentive to take over a rival when you can wait for it to burn through the last of its cash and then take on its clients instead.
There has been some activity: Shore Capital’s acquisition of Stockdale Securities in February; finnCap’s purchase of Cavendish Corporate Finance last October and Cenkos’s deal to pick up Smith & Williamson’s nominated adviser and corporate broking business last August.
When Shore bought Stockdale in a deal worth up to £9m, it catapulted up the broker rankings. In the second quarter, the combined group had the fourth highest number of listed stock market broking clients, behind Numis, JPMorgan Cazenove and Peel Hunt, according to data from Adviser Rankings. Before the deal, it had been ranked 11th.
Since the deal was announced in February, its share price has been in decline — although that has been the case across the industry as equity capital markets have dried up. Over the past six months its shares have dropped around 20 per cent. Larger rival, Numis, is down 7 per cent, while the market value of broking minnow, Arden Partners, has shrunk by almost 40 per cent.
Shore has enjoyed some high profile successes this year. It secured a role as joint corporate broker to Marks and Spencer last October, before M&S unveiled its £600m rights issue to fund its food joint venture with Ocado. Less successful was broking client Non-Standard Finance’s months-long bid to take over Provident Financial. That deal was scuppered as a significant minority of shareholders could not be persuaded to give their backing.
FinnCap took a different route to combat the drought of public listings with its £15m acquisition of Cavendish, a deal that led to finnCap’s own IPO last December. Before the deal FinnCap was mainly focused on equity capital markets — through broking, corporate finance and equity sales. Since the acquisition, the group has positioned itself as an adviser to growth companies, offering M&A advisory services alongside its traditional fundraising business.
Liquidity in the stock is limited, and it is hard to draw much from the share price move from 28p to 26p since it joined the public markets.
The first results since the IPO were released last month. Pre-tax profit rose 40 per cent to £4.3m before exceptional items of £1.1m in the 11 months to March 2019, compared with the year to April 2018.
Cavendish’s contribution to the combined group was only included from the date the deal closed, giving an extra fillip to earnings for the year.
FinnCap warned, however, that Cavendish’s performance was “significantly better than the business would normally generate”. In other areas, FinnCap faced more challenging conditions. Revenues slipped in equity capital markets and trading, and those from transactions and corporate retainers only edged higher.
The acquisition of Smith & Williamson’s nomad business — acting as adviser to Aim-quoted companies — has been less transformational to Cenkos than the shift in its management.
Cenkos announced last November that it was bringing back former chief executive Jim Durkin after an 18-month break from the company. Mr Durkin’s return to the helm came after the broker reported a 90 per cent drop in pre-tax profits for the first half of its 2019 financial year.
But it took nine months for the financial regulator to approve Mr Durkin’s appointment, leaving Cenkos lacking a clear sense of direction at a critical time.
Mr Durkin’s appointment was confirmed this month. The broker scored another success this week when it acted on the IPO of Brickability, which started trading on Aim in one of the year’s biggest listings for London’s junior market.
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