Schroders to purchase rival fund management company Cazenove Capital, netting Cazenove shareholders a fortune
Two of the City of London’s oldest firms are to merge, unleashing a million-pound bonanza for stockbrokers, as Schroders announced on Monday that it will buy its smaller fund management rival Cazenove Capital.
Cazenove, reputed to be the Queen’s broker, is one of the City of London’s most blue-blooded firms, dating back to 1823. Schroders, founded in 1804, has agreed to pay for £424m for Cazenove, spelling a windfall for the smaller firm’s shareholders.
Cazenove is 95% owned by its roughly 1,200 current and past employees and the deal will net shareholders 135p in cash per ordinary share.
“The price must be right for Cazenove shareholders. We can surmise from the fact that [the shareholders] are minded to accept that the price makes sense for them,” said Douglas McNeill, investment manager at Charles Stanley.
The single biggest shareholder, Andrew Ross, Cazenove’s chief executive, who holds 4,592,000 ordinary shares, 2.7% of the total, could be in line for a windfall of £6,199,200. Under the deal, Ross is to become head of UK private banking, reporting to Philip Mallinckrodt, group head of private banking at Schroders.
A spokeswoman at Cazenove declined to comment on individual payouts, but said no shareholder owned more than 2.7% of the shares.
Cazenove’s fund management business was split from its parent company when the Cazenove investment bank agreed a joint venture with US financial giant JP Morgan in 2004.
The tie-up between the two city firms, intended to be complete by June, will create one of the UK’s largest private banking and wealth management firms. Schroders had assets under management worth £229.2bn in 2012, while Cazenove had £11.2bn. The Cazenove brand will be retained for the private banking business, keeping in circulation a name that dates back to the Regency period.
McNeill said the tie-up was a good deal for Schroders, who will “certainly cover their cost of capital”.
Regulation aimed at making wealth management more transparent could stoke further mergers and acquisitions, he said. “There is an element of uncertainty about future margins as a result of regulatory change, and that is giving a lot of wealth management firms pause for thought at the moment, and it may encourage them to respond with more M&A activity.”
Philip Mallinckrodt of Schroders said: “The complementary fit between our two firms, the strong shared service culture, long-term investment approach and established heritage of both businesses make this an ideal match.”
Justin Urquhart Stewart, marketing director at Seven Investment Management, said Schroders had got “pretty good value” on the deal, but that the challenge would be merging the cultures of the competing firms. “They are both fairly traditional [firms], but they have been rivals for some time. The easiest part of the takeover is the takeover. The hard part is making it work.”
He also predicted that a “period of lower, slower growth” and low interest rates would bring more consolidation in the fund-management industry. “There will be more mergers as people try to get economies of scale, but equally there will be more innovation as the smaller firms, boutiques, try new ways of doing things to reduce costs and provide better values.”
Rising costs meant that small firms, handling sums of £20-£40m, were likely to go to the wall, he said. “Whereas costs previously would have been hidden by high returns, now they stick out like rocks through water and rocks rip out the bottom of any fund business.”
Although famed for its traditional ways, Cazenove, or “Caz”, has already moved on since the days it was led by old Etonians, with a butler manning the gold-plated front door at discreet offices behind the Bank of England.
Urquhart Stewart warned against nostalgia for the city of bowler hats and long lunches, before the “Big Bang” regulatory clearout of 1986.
“The city is at its best when it is trying to reinvent itself. The city is at its worst when it is looking at sepia photographs of how good it thought it was. It looks back to pre-Big Bang days and ignores the fact that it was divided by firms according to their religion, it was very white, nearly all male and had fixed commissions.”
“On the other hand, it didn’t have a bonus culture and all the excesses that we have lived through today. The sooner we get back to the attitudes that it is a privilege to manage people’s money and not a right, the better.”
The City of London has always been a draw for foreigners. Cazenove was founded by two brothers, who traced their origins to the Huguenots, the Protestant refugees who fled France in the mid-17th century; Schroders was created by two Prussians, also brothers.
Schroders, established in 1804, grew rich on financing the tobacco, cotton and sugar industry, and by 1900 was one of London’s biggest banks. Cazenove, founded by Philip Cazenove in 1823, carved out a niche providing discreet financial advice to the well-heeled. Cazenove is reputed to be broker to the Queen, something it consistently declines to confirm.
Even the most venerable firms could not stay immune to the changes sweeping the Square Mile for ever. US banking giant JP Morgan bought Cazenove’s investment banking business in 2009, following a joint venture agreed five years earlier, which had left Cazenove Capital as an independent fund management business.