Stifel Financial Corp., the St. Louis-based brokerage, agreed to buy KBW Inc. in a cash-and-stock transaction valued at $575 million to build its financial-services business.
KBW shareholders will receive $17.50 per share, comprised of $10 in cash and $7.50 in Stifel common stock, the companies said today in a statement. The deal values KBW, a New York-based broker-dealer and investment bank, 7.4 percent higher than its closing price on Nov. 2.
Stifel, run by Chief Executive Officer Ronald Kruszewski, has been seeking acquisitions to gain market share as the financial-services industry recovers from the credit crisis. KBW, which lost 67 employees at its World Trade Center headquarters in the Sept. 11, 2001, attacks, has posted a loss in five of the past six quarters as bank mergers dwindle.
The KBW purchase “provides Stifel with an exciting opportunity to grow and become a market leader in the financial-services sector,” Kruszewski, 53, said in the statement. “This combination expands our capabilities at a time when we believe the financial-services sector is poised to benefit from improving fundamentals.”
Stifel’s acquisitions, including Legg Mason Inc.’s capital-markets business and Thomas Weisel Partners Group Inc., have helped the firm post record net revenue every year since 1997, when Kruszewski became CEO. The KBW deal will make Stifel the No. 1 adviser on mergers and acquisitions in the financial-institutions industry, Stifel said in a web presentation.
Stifel was among companies that bid on part or all of bond-trading firm Gleacher & Co., according to two people with knowledge of the matter. Stifel was also in talks to buy Regions Financial Corp.’s Morgan Keegan brokerage last year, people with knowledge of the matter said at the time.
Stifel rose 2.1 percent to $32.58 in New York trading at 4:15 p.m. KBW jumped 7.2 percent to $17.47, the biggest increase in a year.
The purchase is expected to generate a 10 percent to 16 percent return on equity, and it will be 5 percent to 7 percent accretive to earnings per share, Kruszewski said today on a conference call. The transaction is expected to be completed early next year, he said.
KBW is expected to generate between $250 million and $325 million of revenue and $64 million in operating expenses. Stifel is offering retention packages to “key” KBW employees, and about 85 people have signed on, Kruszewski and KBW CEO Thomas Michaud said on the call. Most of the staff cuts will come from employees who don’t deal directly with customers, Kruszewski said.
Stifel said third-quarter net income rose to $37.7 million, or 60 cents a share, from $22.3 million, or 35 cents, a year earlier, according to a separate statement today. Excluding a 9-cent gain on Stifel’s investment in Knight Capital Group Inc., earnings were 51 cents, compared with the 47-cent average estimate of nine analysts surveyed by Bloomberg.
“Stifel’s earnings were strong, and the KBW deal is cheap,” David Trone, an analyst with JMP Securities LLC, said today in a note. “We continue to recommend Stifel, particularly because we felt KBW would bounce back within the year.”
Stifel was one of the companies that participated in the rescue of Knight Capital after the trading firm posted a $440 million loss tied to faulty computer software. Stifel made a $30 million investment.
KBW reported a third-quarter net loss of $3.1 million, or 11 cents a share, compared with a loss of $14.6 million, or 47 cents, a year earlier, according to a statement today. Two analysts surveyed by Bloomberg estimated a net loss of 5 cents.
Deal volume for mergers involving lenders fell 21 percent in the first three quarters of this year to $131.6 billion from the same period last year, according to data compiled by Bloomberg.
KBW had its initial public offering in 2006, and its shares fell 22 percent through Nov. 2. In 1999, KBW canceled a planned IPO after its then-chief executive was caught passing stock tips to his porn-star girlfriend.