Analysts muse over Evolution Group’s mystery suitor and take-out price

Evolution Group’s (LON:EVG) announcement this morning of a takeover approach has triggered speculation as to who the mystery potential bidder might be. Three broad categories of potential acquirers are being highlighted by Peel Hunt: private equity, an in-sector investment bank, and an overseas party.

Peel Hunt adds that while it is futile to try and speculate who the third party might be specifically, Royal Bank of Canada (RBC), which last year snapped up BlueBay Asset Management, one of the UK’s most successful bond trader, for £963 million, would seem an ideal fit.

RBC, which this morning declared a 0.03 per cent stake in Evolution, has a stated intention to enter the UK wealth management sector and already has a growing UK securities arm. Amid the banking crisis over the last 2-3 years, RBC has been looking to actively expand at the expense of rivals worse hit by the turmoil.

Evolution Group saw its shares advance after it revealed it has received a preliminary takeover approach. Mid-afternoon the shares stood at 78.38, up 4.88 pence.

In a terse statement, Evolution stresses that the approach is at “a very early stage and the board is far from certain that it will ultimately result in an offer being made”. It urges shareholders to take no action until management has concluded a full analysis of the approach.

The expression of interest in the group amounts to a turning of tables as Evolution itself has been hunting for suitable acquisitions.

Last year Evolution abandoned negotiations to buy rival Panmure Gordon last year. And only last month recently it revealed that its private client investment management subsidiary, Williams de Bro was in advanced discussions with BNP Paribas Wealth Management over the possible acquisition of BNP Paribas Private Investment Management - the former Fortis Private Investment Management business.

While highlighting RBC as a potential suitor, Peel Hunt analyst Mark Williamson says there are three broad categories of potential acquirer.

With both securities and wealth management markets highly fragmented and exposed to increasing levels of regulation and more onerous capital requirements. That points to a requirement for consolidation, so an in sector deal would appear highly credible.

Some media reports suggest that Collins Stewart (LON:CLST) might fit the bill and that even if it is not the mystery suitor, it might have to look to gate crash the deal as its combination with Evolution makes a lot of sense.

Private equity is another potential player, says Peel Hunt, noting that the sector remains awash with capital and may be attracted to the cash generative nature of the Evolution business and its low valuation.

The third category comprises overseas acquirers, who generally remain attracted to the UK asset accumulation market. RBC sits within this group and would seem and “ideal fit”, says Williamson.

As for a realistic take-out price for Evolution, Williamson’s fundamental valuation for the Group is 86p, although it should be expected that an acquirer would have to pay a control premium.

The analyst says that the extent of the premium would depend on the position of the acquirer.An in- sector acquirer like Collins, for instance, would be able to pay most due to the ability to capture cost saving synergies.

By contrast, a private equity or an overseas acquirer would be unlikely to capture the same degree of synergies and therefore would not be in a position to pay as much.

When trying to look at a potential takeout price, Williamson says it is interesting to look at Investec’s (LON:INVP) takeover of small rival  Rensburg Sheppards last year in a deal which valued the equity of the latter at £412m. Williamson notes that deal was undertaken at a price/assets under management multiple of 6%.

Applying this to Evolution would suggest a value of £198m for the broker’s wealth management business. Then simply adding in its securities business at asset value (£35m), and the surplus cash at face value (£40m), suggests a value of £273m equating to 117p, nearly 60% per cent above the current share price.

Peel Hunt currently rates Evolution shares a ‘buy’ with a price target of 86p.

Last month Evolution posted adjusted operating profits of £6.5m for the six months to the end of June - down from £7.0m last time – on turnover of £51.6m versus £56m last time. Pre-tax profits however rose to £4.3m from £3m a year ago.

The group also maintained its interim dividend of 1p.

Evolution chief executive Alex Snow noted at the time that, overall, the first half of 2011 had been good for the group.

He added: “Against the backdrop of vicious market conditions these achievements, together with the group's continued financial strength, ensure the group is well positioned to see through the inevitable on-going turbulence, and also take advantage of further growth opportunities.”