London Broker Mergers Leave Firms on Hunt for New Advisers

(Bloomberg) — For companies listed on the London stock exchange, a corporate broker is typically a must-have. Without one, you lose the middleman who handles interactions with investors — and the exchange can even suspend your shares.

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So listed firms have good reason to be checking up on their brokers, as a wave of mergers in the industry — most recently the tie-up between Panmure Gordon and Liberum — highlight the precariousness of business models built on corporate dealmaking that’s all but dried up.

More than one hundred London-listed companies have either left or appointed a new corporate broker in the last three months of 2023, roughly twice as many as in the same period a year ago, according to figures from data provider ARL. When pitching, brokers are being asked more questions about their financial health, multiple people involved in the processes said, declining to be identified discussing private information.

Corporate brokers have been a unique part of the City of London for centuries, handling what’s still seen as steady but not particularly lucrative work such as lining up buyers for shares or making sure the client company stays onside of the London Stock Exchange Group’s listing rules.

The relationship between broker and company can lead to more lucrative contracts if the client gets involved in a takeover, for example. The mandates tend to last roughly a decade and firms usually only look for a change when planning a strategy shift — they might add a second broker if they’re considering a transformative deal — or a broker loses key staff.

But the trend of broker-hopping can be “contagious,” said Robert Pickering, a former chief executive officer of Cazenove & Co., the storied City firm that was bought by JPMorgan Chase & Co. in 2010 and continues to dominate broking. Many UK-listed companies “are disappointed with their share price and some might think that if they hire a new broker, maybe things will improve,” he said.

Smaller Players Hit Hard

With London’s markets missing out on last year’s equities rally, initial public offerings still dormant and the pool of smaller listed firms in the UK capital shrinking, brokers have felt a tightening squeeze on many sources of revenue.

The merger between mid-cap boutiques Panmure Gordon and Liberum announced last week was the latest among a slew of deals as smaller brokers search for scale.

A few days before the deal was announced, Frasers Group Plc — a retail conglomerate on the blue-chip FTSE 100 index — replaced Liberum with Wall Street firm Jefferies Financial Group Inc. Investment manager Brooks Macdonald Group Plc last week replaced independent Peel Hunt Ltd. with Investec, part of the South African lender of the same name.

These changes also highlight the winners in this upheaval: bigger players who can offset losses in capital markets divisions with revenues from commercial or private banking. Alongside the likes of JPMorgan Cazenove and Barclays Plc are adding large-cap clients, while other global investment banks such as Investec Plc and Royal Bank of Canada are looking to win share in London’s shrinking mid-cap space.

“Brokers have come under more pressure to demonstrate their financial strength and breadth of services they offer,” said Lisa Gordon, who chairs mid-cap investment bank Cavendish Financial Plc. Gordon added that she viewed this development as a positive for Cavendish, which was formed by a merger between FinnCap and Cenkos last year.

Some smaller brokers have expanded beyond the UK or built debt and private markets advisory services to see them through the dry spell, but consolidation is proving a popular option. Last year’s acquisition of Numis by Deutsche Bank AG for £410 million ($520 million) is one of the biggest examples to date.

The creation of Panmure Liberum leaves Peel Hunt as the last well-known UK mid-cap specialist that hasn’t sought a tie-up yet. The firm was owned by Belgian bank KBC Group NV for nearly a decade before a management buyout in 2010. The firm listed on London’s Alternative Investment Market for smaller companies in 2021 and has since fallen nearly 50%, ironically demonstrating to clients the risks of going public and giving it a valuation of just over £140 million.

Many observers in the industry wouldn’t be surprised if Peel Hunt became a takeover target, seeing it in a position similar to Numis before the Deutsche Bank deal.

A spokesperson for Peel Hunt declined to comment.

Consolidation Doubts

Some veterans worry that in the absence of a market comeback, smaller firms might be unable to generate enough to pay bonuses and keeps staff motivated, given the relatively small fees they collect.

“What preoccupies you most in a downturn is how to retain your talent,” Pickering said. “If you lose people, that’s when you lose your will to operate as an independent firm.”

With Deutsche Bank, Numis potentially faces the opposite problem: becoming too big. Some of its smaller clients have been eyeing new corporate brokers in recent months because they want the increased attention that comes with a smaller broker, two people familiar with the matter said.

The combined firm hasn’t lost clients as a result of the deal, according to Alex Ham, co-chief executive. Indeed, it felt the benefit of Deutsche Bank’s balance sheet capabilities when acting as main coordinator on Zegona Communications Plc’s €300 million ($327 million) equity raise to help fund its acquisition of Vodafone Group Plc’s Spanish unit, he said.

Deutsche Bank was already broker to blue-chip firms such as BAE Systems Plc before the deal, and the combined outfit’s average client size is north of £1 billion, while competitors such as Panmure Liberum generally cater to clients with a market capitalization of less than £500 million.

Rebound Hopes

There are some signs that dealmaking will stir back into life in 2024. Air Astana, Kazakhstan’s flag carrier, and London Tunnels, a company developing once-secret passageways in the city into a tourist attraction, said last week they plan UK stock-market listings.

Bankers, however, aren’t celebrating yet as a substantial recovery could well be a year away, given the uncertainty around expected interest rate cuts and major elections.

“Instability in markets is the biggest fear of a board,” said Ham. “That’s when they really need their advisers and then they also want to know if their broker will be there for them in the future.”

Read More: London’s Brokers Face a Crunch as Downturn Picks Off the Weakest

–With assistance from Katherine Griffiths.

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