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Advisor Group’s new IBD giant is leveraged on network appeal

Ladenburg IBDs 2018 revenue
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Two major IBD networks are joining forces against the largest firms in the space.

Nearly a year after cashing out its former principal shareholder, Ladenburg Thalmann found a buyer building a new giant of the independent broker-dealer sector. The buyer, Advisor Group, is also assembling more debt under its latest massive private equity deal.

Reverence Capital Partners-backed Advisor Group struck a deal to acquire Ladenburg's five IBDs with 4,400 advisors for $1.3 billion, the firms said Nov. 11. The agreement would create a network of nine firms with 11,500 advisors and $450 billion in client assets upon its expected closure in the first half of next year. It would also take Miami-based Ladenburg private.

With some $3.07 billion between the two networks in 2018 revenue, Advisor Group’s latest M&A deal would place the network just ahead of Raymond James Financial Services ($2.41 billion) and behind only Ameriprise ($4.80 billion) and LPL Financial ($5.19 billion) in the IBD sector.

The notable revenue and client assets — not to mention the scale of the expanded firm — also come with risks: Moody’s Investors Services and S&P Global Ratings cited Advisor Group for its high debt levels after Reverence agreed to purchase a majority stake in it earlier this year.

Continuing record M&A activity is reshaping wealth management. Advisor Group and Ladenburg are betting that the nine firms’ independent subsidiary structure will attract and retain advisors seeking smaller firms with the greater scale of a well-capitalized parent.

Ladenburg's $130-million buyout of most of ex-Chairman Phillip Frost's stake in the firm last year was "in no way a driver" of the deal, CEO Dick Lampen said in an interview the day after the announcement. He and Advisor Group CEO Jamie Price emphasized similarities between the IBD networks, such as sharing the same custodians and independent subsidiary structure.

“Mergers like this typically don’t work if there isn't a good cultural fit, first and foremost,” says Price, who is slated to lead the combined firm out of Advisor Group’s Phoenix headquarters “We felt there was a need in the marketplace for it.”

Price added that Advisor Group saw value for its existing 7,000 advisors in resources from Ladenburg’s other divisions, which include an investment bank, asset manager and trust company. He also praised Securities America’s practice management and coaching, as well as the hybrid RIA platforms at Ladenburg’s largest subsidiary IBD and its second-biggest one, Triad Advisors.

“Our focus has always been supporting the growth and success of our advisors,” says Lampen. “We delivered everything that we have always said was important to us, in terms of doing right by our advisors and employees.”

Neither Lampen nor Price disclosed the specifics of how the definitive merger agreement would take Ladenburg private, though they said more information would become available in coming months. Lampen and other insiders own approximately one-third of the company’s stock.

While Ladenburg took in record net income of $34 million and a new high in annual adjusted EBITDA of $100 million in 2018, the value of its stock hasn’t approached $5 per share in at least the past five years. The day after the deal announcement, the stock surged by around 25% to nearly $3.50 per share — the amount Advisor Group would pay for Ladenburg’s common stock.

The final purchase price also includes the cost of the seller’s preferred shares and its outstanding debt. Ladenburg’s average outstanding debt balance soared by more than 100% year-over-year to $330.8 million in the third quarter, according to its last earnings. Its interest expenses also jumped 94% to $6.2 million — even after they already quadrupled in 2018.

Meanwhile, Reverence Capital’s acquisition of a 75% stake in Advisor Group earlier this year reportedly cost more than $2 billion. Advisor Group’s “increased earnings and improvements in operations will permit it to handle the 2.5x increase in debt,” S&P said in late June.

The ratings agencies put Advisor Group in the middle or upper tranche of risky issuers. While S&P rates Advisor Group a “B+” issuer with a negative outlook, Moody’s gives it a “B2” rating with a stable outlook. The firm’s adjusted debt-to-2019 EBITDA is 6.3x, Moody’s states.

“Advisor Group will focus on growth through recruiting of financial advisors and deployment of capital towards bolstering the firm's position in the independent broker-dealer space,” according to Moody’s Oct. 8 periodic review.

Price says that the combined earnings power of the two companies is “more than prudent” for paying down the debt under any scenario. Reverence — which three Goldman Sachs alums started in 2013 with a focus on middle-market financial services — also has Russell Investments and First Republic in its current and former portfolio firms, its website shows.

The Reverence-backed parent’s setup will resemble the existing one: none of Ladenburg’s five firms will merge into Advisor Group’s four IBDs. While some advisory accounts may require client notifications, the firms’ custodians will stay the same with no repapering.

Price also said that, while it was early and the decision may be subject to change, the parties haven’t planned any retention bonuses for advisors because there won't be repapering. Only added value is being brought to bear under the deal, he says.

In a call for advisors that followed an email blast after the previous evening's deal announcement, Price drew attention to his firm’s onboarding technology, marketing services and succession planning. Lampen asked advisors to reach out to leadership with any questions.

The combined firms’ headcount would push it well above Cetera Financial Group’s 8,000 advisors but below LPL Financial’s force of more than 16,000. Ladenburg COO Adam Malamed told advisors on the call that the buyer and seller already share a great deal in common.

“The company operates a network model very similar to Ladenburg’s,” he said. “This transaction creates one of the most innovative leaders across the entire wealth management space.”

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