Let others argue over whether Deutsche Bank’s agreed bid for Numis is a demonstration of confidence or a distress signal.
Not for us are debates about whether the £410mn offer is an endorsement of the London market’s durability or a wildly expensive way to cross-sell to just 166 corporate broking clients. Not for now are questions around why Deutsche is buying a cash equity franchise just three years after closing its own, or around why a bolt-on acquisition is a more productive use of capital than a buyback when its stock is trading at just 0.3 times tangible book value. So much will be written today about the merits of the Global Hausbank strategy that we see no immediate need to add to it.
Instead, we’ll add a footnote.
On January 18, 2023, Numis awarded 2mn performance shares to executive management as part of its 2021 long term incentive plan. Alexander Ham and Ross Mitchinson, joint CEOs since 2016, were both awarded 887,850 performance shares at nil cost, which at Deutsche’s 350p bid value are worth £3.1mn to each.
In total, Ham holds 2.4mn Numis shares and another 2mn of options vesting between 2024 and 2026. Mitchinson also has 2mn options in addition to 2.1mn shares. Both CEOs have agreed to stay in their current roles and both have signed irrevocables to sell their approximately £14mn of equity etc to Deutsche.
What happens to unvested share options won’t be known until the scheme document is released; the usual routes in friendly M&A are assumption by the buyer at the offer price or cashing out. Whichever way, it’s likely to be less challenging than hitting the top-band 20 per cent per annum total shareholder return target that’s attached to the 2021 share scheme.
For a long time, all talk around the London midmarket brokers has been bleak. There are just too many firms, precious few IPOs and a lot of idle hands.
Numis itself reported a 72 per cent drop in 2022 full-year profit on revenue down 33 per cent. One of its privately owned neighbours is rumoured to be burning through £2mn a month just to keep the lights on. Two-drunks style merger gossip surfaces approximately twice a week, and is nearly always denied in the present tense.
Where Deutsche fits into this picture is complicated. The company says Numis will anchor its European corporate finance strategy, which needs a strong UK presence because it’s 20 per cent of the total. The deal is too small to affect the cash returns policy, but will be EPS profitable by 2024. Secondary equities don’t sound like they feature on this roadmap.
Timing-wise, Deutsche’s unsecured credit funding costs are still below plan thanks to a mild January and February, while deposit flows are said to have stabilised in April. If management believe in the value of this strategic curveball then better to throw it now than a month ago, when the resultant 9 basis-point reduction to its CET1 ratio would probably have been read somewhat differently.
Whatever, the only certainty is that the Germans are buying some exceptionally talented equity salesmen, as demonstrated by their opportunely timed selling of themselves.
Further reading:
— UK companies face new wave of takeovers, warns Numis (FT)
— Oh, Germans! (YouTube)