At the beginning of earnings season, Regions Financial Corp. (RF) finally succeeded in selling its securities brokerage arm, Morgan Keegan & Company, Inc. On Wednesday, Regions entered a stock purchase agreement with Raymond James Financial Inc. (RJF) to sell Morgan Keegan for $930 million.
Under the terms of the deal, Regions would also receive a dividend of $250 million from Morgan Keegan before closing, thereby projecting $1.18 billion as the net amount of the proceeds.
The deal awaits regulatory approvals and other customary closing conditions and therefore, is expected to close during first quarter of 2012. However, Morgan Asset Management and Regions Morgan Keegan Trust are retained as part of Regions’ Wealth Management organization.
Goldman Sachs Group, Inc. (GS) and Sullivan & Cromwell LLP are acting as advisors to Regions. Moreover, JPMorgan Chase & Co. (JPM) and Morrison & Foerster LLP are counseling Raymond James on this issue.
With the sale of Morgan Keegan, Regions projects an impairment charge in the range of $575 million to $745 million (non-deductible) in the fourth quarter of 2011, which would be associated with $745 million of goodwill included in its Investment Banking/Brokerage/Trust segment.
For the fourth quarter of 2011, Regions estimates the net loss available to common shareholders to be in the range of $432 million-$633 million or 34-50 cents per share. The company expects net loss from continuing operations in a range of $101 million to $197 million or 8-16 cents per share. Moreover, net income from continuing operations without the goodwill impairment charge (non-GAAP) is projected to be between $88 million and $119 million or 7-9 cents per share.
Moreover, Regions expects the deal to increase the Tier 1 regulatory Capital and Tier 1 Common (non-GAAP) ratios by about 13 basis points and 9 basis points, respectively.
Following the divestiture, Regions aims to concentrate on its core banking business while providing products and services to its clients in a better way. Moreover, the company will have strong revenue opportunities through a business relationship with Raymond James. The two firms are anticipated to start several mutually beneficial business relationships, including deposits, loan referrals and processing, which would benefit the shareholders in the long run.
John Carson, CEO of Morgan Keegan, aims to continually offer its exceptional services to individual and institutional clients after being part of Raymond James. Additionally, Regions and Raymond James ensure providing same level of service to Morgan Keegan’s customers with Regions’ banking relationships.
On the other hand, the agreement depicts Florida-based Raymond James’ expansion strategies to move ahead with smaller acquisitions. Though the firm emphasizes on organic growth, great opportunity at right time along with correct price are subjects to be addressed. For Raymond James, it is the most important agreement it has ever entered into, which in turn would expand its brokerage and capital markets business.
Raymond James expects the purchase not to benefit 2012 earnings, but would augment profit by 2–3% in the following years. Furthermore, Morgan Keegan’s current headquarters at Memphis will be the headquarters of Raymond James’ Fixed Income and Public Finance businesses. In addition, Raymond James will also continue to control a regional support center in Memphis.
Regions had acquired Morgan Keegan in 2001. Since 2007, Regions is posting annual loss though recorded profits in the last four quarters, and is yet to receive regulatory approval to repay $3.5 billion as the government bailout money.
In June 2011,Morgan Keegan has agreed to pay $200 million to settle down fraud charges against it, related to subprime mortgage-backed securities. They were involved in fraudulently marketed mutual funds. Financial Industry Regulatory Authority (FINRA) and a force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina all joined the SEC for taking action against Morgan Keegan.
Since then, Regions put up Morgan Keegan for sale in a bid to raise capital and repay the federal government for its funds. Therefore, Regions would indemnify Raymond James for all legal matters associative with pre-closing activities.
Though de-risking measures are quite encouraging at Regions, the upfront costs of such initiatives cannot be ignored. Additionally, regulatory issues also remain a major area of concern. Regions’ favorable funding mix, improved core business performance, its expansion mode and strategies will continue to yield profitable earnings in the upcoming quarters.
Regions currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain a “Neutral” rating on the stock.
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
REGIONS FINL CP (RF): Free Stock Analysis Report
RAYMOND JAS FIN (RJF): Free Stock Analysis Report
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