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Lean times point to M&A action for UK brokers

LONDON (Reuters) - UK equity brokers look to be prime candidates for consolidation as sector overcapacity, an anaemic capital raising market and low valuations combine to promote an environment ripe for M&A activity.

A dealer monitors her screens on the trading floor of IG Index in London May 6, 2010. REUTERS/Kevin Coombs

Equity brokers such as Collins Stewart CLST.L and Numis NUM.L have suffered tumbling profits and seen share prices slump since the collapse of Lehman Brothers in 2008, which saw the bottom fall out of capital raising markets.

And unlike the banks, brokers have not seen a revival of fortunes since March last year and last when markets rebounded. Shares in Astaire Group ASTR.L, which snapped up several players in the industry in 2009 and is now trying to sell its securities arm, fell 24 percent on Tuesday after it announced losses in the first half of 2010.

Ambrian Capital AMBN.L swung to a first half loss last week and has shed more than a third of its stock market value over the last five months.

“I can see that there will be consolidation for a number of reasons,” said Andrew Gibson, head of research at Galvan, a contract-for-difference advisory firm in Truro Cornwall.

“Their core market, IPOs and M&A, never got back to their peak in 2000. Trading volumes did recover but they got eaten away at by the popularity of spread betting and ETFs (Exchange Traded Funds) which ate away at their core stock broking operations.”

Data from research firm Compeer shows that there were 1.8 million spread betting trades in 2009 through execution only stockbrokers compared to just 600,000 in 2007, as it balloons in popularity.

IPO’s and capital raising activities can contribute more than a third of profits of small brokers.

IPO activity on the main London bourse is running at less than a quarter of that of 2007 and is only an eighth of the 2007 total for the AIM-listed market, leaving a large group of smaller brokers scraping over what little business there is to go around.


The 12 month forward price earnings ratio for Numis is 14.52 compared with 31.08 at the same time last year, while Collins Stewart has fallen to 10.53 from 13.08 according to Thomson Reuters Datastream.

Those valuations may look attractive for players already in the market with ambitions to grow in what is, relative to continental Europe, a fragmented and relatively large independent broking market.

“Everybody will be stretched on their ability to make commission so it would make more sense to have a smaller number of larger companies,” said Sarah Spikes financials analyst at Arden Partners.

“You could argue that this will be a time of high demand for consolidation efforts because volume has been declining at the same time fund management companies have been paying less for dealing.”

Stockbroker Panmure Gordon PMR.L has found itself on the radar of larger rival broker and investment bank Evolution Group EVG.L.

Evolution said earlier this month it was mulling a possible acquisition but Panmure Gordon said, despite its interim loss, it wants an independent future.

“Evolution are opportunistic, they’ve made a lot of acquisitions like Dresdner Kleinwort, and if they can buy Panmure’s corporate client list and one or two other things at an attractive price then they would be interested,” Keith Baird, analyst at Oriel Securities, said.

Baird at Oriel named other potential candidates for consolidation as Collins Stewart, Numis and Daniel Stewart DAN.L.

Tougher regulations make it harder for start-ups and make consolidation a more attractive option by lessening the risk that top talent will exit under a new regime to set up in competition.

“The FSA has toughened up regulations, sharpened the vetting process and requires raised capital requirements so there are higher barriers to entry,” said Gibson at Galvan.

“You are less fearful of new entrants so you can be more confident when you make an acquisitions that your assets are not going to walk out of the door.”

However, as Panmure Gordon has demonstrated, low valuations can also increase the reluctance of owners to sell at what they hope is the bottom of the market.

Additional reporting by Vincent Flasseur; editing by Elaine Hardcastle