(Updated in 10th paragraph to say that Reverence Capital owns 100% of Advisor Group.)
Advisor Group said Monday night it will buy Ladenburg Thalmann Financial Services in a cash deal that will preserve the independent broker-dealers’ nine brands, include almost 11,500 brokers and be led by Advisor Group CEO and President Jamie Price.
The deal, which has an “enterprise value” of $1.3 billion based on Ladenburg’s common and preferred stock and outstanding debt, is expected to close in the first half of 2020.
Phoenix-based Advisor Group operates FSC Securities Corporation, Royal Alliance Associates, SagePoint Financial and Woodbury Financial., while Miami-based Ladenburg is the parent of Securities America, Triad Advisors, Investacorp, KMS Financial Services and Securities Service Network (SSN).
The combined firms will be second to LPL Financial Corp. by the size of its brokerage force. LPL had 16,349 affiliated independent brokers as of September 30. The Ladenburg firms have about 4,400 advisors, and Advisor Group more than 7,000. The companies did not discuss whether Advisor Group will offer retention packages to advisors.
Advisor Group had a leg up on other potential acquirers because its firms use Bank of New York Mellon’s Pershing and Fidelity Investments’ National Financial their largest clearing providers. “No repapering of client accounts will be necessary in connection with this transaction and its closing,” they said in the press release announcing the deal.
“Advisor Group and Ladenburg have a shared commitment to the flexibility of third-party clearing, together with maintaining a ‘small firm feel’ delivered through the distinct management teams and cultures of a multi-brand network model,” Price said in a prepared statement. “In today’s fast-consolidating marketplace, where advisors fear becoming just another number in the crowd, the more intimate service culture and sense of community that our multi-brand approach offers is increasingly in demand.”
“I was concerned about whether they were going to disrupt the culture and staffing, and at this point, they’re saying they won’t,” said Jon Henschen, a recruiter in St. Croix, Minnesota, who focuses on independent broker-dealers. “A lot of reps like mid-size broker-dealers because they feel like they have the ear of management.”
In announcing the deal, the firms also emphasized their desire to continue expanding from traditional transaction-based brokerage into fee-based advisory models. The new firm will support “all financial advisor business models, including the hybrid advisor doing both securities and advisory business, as well as the ‘investment advisor-only’ professional who is either utilizing a corporate RIA platform, or has an independent RIA,” AdvisorGroup said in a press release.
The pending merger illustrates the increasing attractiveness of the independent advisory model to private equity firms, and the consequent push by those firms for rapid growth as a glide path toward a relatively quick monetization of their investments.
Reverence Capital Partners bought 100% of Advisor Group for $2.3 billion earlier this year from Lightyear Capital, another private equity firm founded by former PaineWebber Chief Executive Donald B. Marron. Lightyear and a Canadian pension plan bought the broker-dealer then known as AIG Advisor Group in 2016 from its founding company, insurance giant American International Group.
“By combining these two firms, we have created one of the most robust platforms in the country to support advisors’ growth, with the scale, resources and intellectual capital to position them for success, no matter their business model or client focus,” Reverence co-founder Milton Berlinski, a former Goldman Sachs banker, said in a prepared statement.
Bank of America, UBS Securities, Barclays, Deutsche Bank Securities and Goldman, Sachs & Co. have committed financing for the transaction, Advisor Group said.
As part of the deal, Advisor Group also will also buy publicly traded Ladenburg’s Highland Capital Brokerage, which provides insurance brokerage platforms to financial firms, trust services company Premier Trust and Ladenburg’s middle-market investment banking business.
Some potential buyers balked at paying for the banking business, sources said. Each of the subsidiaries “has played a role in delivering unique, value-add solutions to Ladenburg-affiliated financial advisors,” the companies said in the press release announcing the agreement.
For Ladenburg, which was founded 143 years ago in New York by the son of a German immigrant, the transaction completes a rapid change in its modern incarnation. Dr. Phillip Frost, the founder of pharmacology group OPKO Health, Inc., bought a majority stake in the company 15 years ago and moved its headquarters to Miami. The firm had devolved by then into largely a penny-stock firm.
Frost rapidly expanded its independent broker-dealer model, but last December agreed to a $5.5 million penalty from the Securities and Exchange Commission and a ban from the brokerage industry for allegedly artificially inflating the price of some OPKO holdings.
He stepped down as Ladenburg’s chairman, and the firm on December 24 repurchased almost 51 million shares from him and related entities at $2.50 per share, using $50.9 million in cash on hand. It financed the retirement of Frost’s shares by raising $76.4 million in 7.25% ten-year senior notes. Ladenburg also paid Frost $3 million in cash last December to cancel options he still held.
Ladenburg on Friday said its net revenue in the first nine months of 2019 rose 3.6% to $1.074 billion while net income dipped to $22.3 million from $24.2 million in the comparable 2018 period.
In apparent preparation for a sale, it said in its third-quarter filing with the SEC last week that it spent $160,000 on severance costs in the quarter and $1.27 million in severance over this year’s first nine months. It had no “acquisition-related” expenses in the third quarter, and amortized $139,000 of retention and recruiting loans in the July-September period, up 43% from the year-earlier quarter.
Shares of Ladenburg, which have soared 54% since Bloomberg reported on November 1 that it was in merger talks and had hired Jefferies as its investment banker, were up 23.7% in mid-morning trading on Tuesday at $3.48 a share.
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