Will Cazenove Be A Blushing Bride?

Short of capital, the venerable City firm is exploring a union with a big bank

David Mayhew, Chairman of Cazenove Group PLC, is worried. His 181-year-old firm, whose corporate advisory business depends on clubby City of London traditions, appears increasingly out of date and is not generating enough revenue to attract top young talent. Yet he doesn't want to throw away the reputation for independence and discretion that attracts clients to Cazenove in the first place.

Mayhew's recent actions, meanwhile, have exposed Cazenove to just the sort of publicity the firm has always tried to avoid. Looking for capital and a way to offer clients a wider product range, Mayhew has begun shopping around his beloved firm. His moves have attracted press speculation and at least two proposals -- from Lehman Brothers Inc. and J.P. Morgan Chase & Co. At the same time, he continues to talk about a possible public offering. "We are working hard to find the correct solution," said Mayhew at the firm's annual meeting on Sept. 6, while declining to elaborate further.


At first glance the firm, which was founded in the early 19th century, seems like an eccentric irrelevance -- a bastion of old Etonians where proper attire and manners are reputedly as important as business acumen. Yet Cazenove retains a key foothold in the City, whose importance as a financial center is on the rise.

Cazenove boasts an advisory role to no fewer than 42 of the top 100 British companies. Those connections make Cazenove and the corporate broking activities that are its lifeblood alluring to big American firms. "Investment banks that are serious about the equity business in Britain have to have a strong corporate broking presence," says Paul Baker, who is building a corporate broking unit at Morgan Stanley in London.

Corporate brokers are a peculiar City institution. They act as a company's go-between with institutional investors and provide intelligence on how shareholders will react to, for instance, a takeover proposal. Mayhew, 64, is considered peerless at this skill. Slim and equipped with a wry sense of humor, he tends a roster of clients that includes Diageo, BT, Marks & Spencer, and Centrica. Cazenove leads the City in broking.

Cazenove enjoys unique access: A company's broker can make frequent visits to the CEO and other top execs -- even if only to rehearse an earnings announcement. Brokers also get first crack at equity offerings. But Cazenove doesn't have the capital to underwrite major bond deals or the expertise to design derivatives. Revenues for the year ending Apr. 30 were just $446 million -- a pittance compared to the billions raked in by big banks. And Cazenove's knowledge is limited mostly to British institutions.

A union with one of the big U.S. banks would give Cazenove access to a wider product range, global knowhow, and fat balance sheets. Lehman's offer is a straight takeover with $890 million paid up front and more money later. J.P. Morgan is playing to Cazenove's sensitivities about independence by offering a joint venture that would preserve the heart of Cazenove as the bank's British investment banking franchise. Mayhew and CEO Robert Pickering would remain in their posts.

City denizens are skeptical that Cazenove's reputation for independence could survive a union. "In this day and age an independent point of view has become if anything more important," says Paul D. Roy, former co-head of investment banking at Merrill Lynch & Co. and a co-founder of NewSmith Capital Partners, an independent London firm.

Money may be another issue. It is hard to evaluate the J.P. Morgan offer, but Lehman's is well below the roughly $2 billion value established for Cazenove when it became a private shareholding company in 2001. About 10% of Cazenove is held by institutions. They may want to hold out for higher offers.

If so, time may be on their side. Cazenove's profits for the quarter ending July 30 were up sevenfold, to $26.3 million. Mayhew might be able to wrangle a better price later -- provided this unseemly fuss doesn't cost the firm precious clients.

By Stanley Reed in London

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