Raymond James to Buy Regions’s Brokerage for $930 Million

Raymond James Financial Inc. (RJF), in a deal that will combine two of the U.S. Southeast’s biggest brokerages, agreed to buy Morgan Keegan & Co. from Regions Financial (RF) Corp. for $930 million.

Morgan Keegan also will pay a $250 million dividend to Regions before the deal is completed, the Birmingham, Alabama- based seller said yesterday in a statement. The transaction requires regulatory approval.

Raymond James is taking advantage of Regions’s move to raise money to help repay a $3.5 billion U.S. government bailout, the largest sum still outstanding for any institution under the U.S. Treasury Department’s bank-rescue program. The deal is a departure from Raymond James’s strategy of expanding through smaller acquisitions, the St. Petersburg, Florida-based firm said in a separate e-mailed statement.

“While our preference is generally organic growth, we have used strategic mergers to grow throughout our history when the timing and pricing are right and, most importantly, when there is a strong cultural fit and clear path for integration,” Raymond James CEO Paul C. Reilly said in the statement. “This merger reflects those tenets.”

Raymond James, founded in 1962, hasn’t made an acquisition with a disclosed value greater than the C$125 million ($123 million) it agreed to pay in 2000 for a Canadian brokerage, according to data compiled by Bloomberg.

The addition of Morgan Keegan’s more than 1,000 private- client financial advisers would increase Raymond James’s adviser ranks to more than 6,000, the acquiring firm said. The deal creates one of the largest wealth-management and investment- banking firms beyond Wall Street, Raymond James said.

Financing the Deal

Raymond James expects to finance the deal with a $600 million bond offering and a $300 million equity issuance, Chief Financial Officer Jeff Julien said today on a conference call. The firm said the deal will break even in 2012 and will be 2 percent to 3 percent accretive to earnings in 2013.

Raymond James fell $1.30, or 3.8 percent, to $32.88 at 9:37 a.m. in New York trading. Regions declined 2.1 percent to $4.70.

“It would take years of organic recruiting, as well as significant up-front incentives, to grow to the level achieved through the merger of the two firms,” Raymond James said.

Raymond James expects to set aside $215 million in cash and restricted stock for retention payments, Julien said on the call.

The firm’s initial bids for Morgan Keegan were “thrown out” at the start of negotiations because they weren’t as high as offers from private-equity firms, Raymond James Executive Chairman Thomas James said on the conference call.

‘Organic Recruiting’

Founded with five workers in 1969, the Morgan Keegan unit has more than 300 offices across the Southeast and Midwest, including Texas, Missouri, Ohio, the Carolinas and Florida. It has more than 3,100 full-time employees, 1,200 financial advisers and 25 senior analysts, according to its website.

“The bigger you are, the more you can pay for better executives, the stronger you are as a shop,” Mark Williams, a lecturer at Boston University’s School of Management, said in a phone interview before the deal was announced. “A merger like this would be very positive for Raymond James. They can’t grow organically in this market.”

Regions said in June that Goldman Sachs Group Inc. (GS) would help evaluate options for Morgan Keegan, which provides brokerage and investment-banking services.

‘Helps Us Focus’

The sale “helps us focus on our core banking business,” Regions Chief Executive Officer Grayson Hall, 54, said in his firm’s statement. Morgan Asset Management and Regions Morgan Keegan Trust aren’t included in the sale and will remain part of Regions’s wealth-management organization.

Hall and Chief Financial Officer David Turner, in a conference call with analysts, didn’t say when the company would return the bailout money to the Treasury’s Troubled Asset Relief Program.

“Obviously there’s some expectation that there will be increases in capital required that would address liquidity as well as capital relative to TARP repayment,” Turner said. “You really gotta look at both of those needs. We’d need some additional cash in the holding company, which we’d expect to get from that capital raise.”

Fourth-Quarter Loss

Morgan Keegan agreed to be sold to Regions in 2000 for about $789 million. The unit, based in Memphis, Tennessee, had a $26 million third-quarter profit, Regions said on Oct. 25. That was up from $22 million a year earlier and a decrease from $60 million in the second quarter.

Regions said it expects to record a fourth-quarter non-cash impairment of $693 million as a result of the sale. The deal is expected to be completed in the current quarter, the bank said.

Net loss for the fourth quarter was in a range of $432 million to $633 million, or 34 cents to 50 cents a share, the lender said. Net income from continuing operations, excluding the impairment charge, will be $88 million to $119 million, or 7 cents to 9 cents. The average estimate of 26 analysts in a Bloomberg survey is for earnings per share of 6 cents.

Regions said it expects the transaction to boost Tier 1 capital by 13 basis points.

Goldman Sachs, JPMorgan

Hall told investors in September that TARP repayment would depend on achieving “sustainable profitability” and an improvement in credit, not just selling Morgan Keegan. Regions is the 10th-biggest U.S. bank by deposits.

Stifel Financial Corp. (SF), a St. Louis-based brokerage, had also bid for Morgan Keegan, people familiar with the matter said in December.

In addition to Goldman Sachs, Sullivan & Cromwell LLP is advising Regions on the transaction. JPMorgan Chase & Co. (JPM) and Morrison & Foerster LLP are counseling Raymond James.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net

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