By Ted Carter
You can toss out public relations as a reason Regions Financial, parent of Regions Bank, wants to get rid of wayward brokerage and investment banking subsidiary Morgan Keegan.
It comes down to money – specifically the $3.5 billion the Birmingham-based Regions still owes the U.S. Treasury’s Troubled Asset Relief program, analysts say.
J.P. Morgan analyst Vivek Juneja, in guidance issued last week, put the valuation at north of $700 million, a sum that could ease the strain of raising capital to pay off TARP. “Gain from sale of Morgan Keegan could reduce that capital raise significantly,” Juneja said.
Selling Memphis-based Morgan Keegan adds minimal value to Regions but does give a clear indication of the pressure Regions is under to raise additional capital, said Chris Gamaitoni, an analyst with Compass Point assigned to Regions Financial.
Settling federal and state investigations of broker misconduct, specifically the concealing of toxic assets in certain investment funds, cleared the way for Regions to begin looking for a buyer.
The day after announcing the settlements Regions said it hired Goldman Sachs to review “strategic alternatives” for Morgan Keegan. The review does not include the brokerage’s asset management and trust operations, both of which Regions is moving in-house.
Kevin Fitzsimmons, managing partner of Sandler O’Neill and an analyst assigned to Regions Financial, said Regions very much wants out from under its TARP obligation, which is costing Regions $44 million a quarter in preferred dividend payments to Treasury. But raising money through a common stock offering that would dilute current shares is an unattractive option, Fitzsimmons said in an interview Monday.
“I think this is about pulling whatever lever it can to boost its capital,” he said.
“They want to do everything they can to not have a common share raise.”
Regions ultimately must determine “what is its core business” as it looks to preserve capital and redirect capital, Fitzsimmons said, and added the numbers he has heard for a sale price at “roughly $1 billion or a little more.”
Regions bought Morgan Keegan in 2000 for $789 million. Today the full-service brokerage has more than 300 offices in 20 states.
In its analysis, J.P. Morgan said a potential buyer would likely have to come from outside Regions’ banking footprint. Regions wants needs to coordinate with Morgan Keegan’s corporate banking business to “facilitate capital raising for corporate clients,” J.P. Morgan said in its report.
This, said the report, “would restrict buyers that are part of banks with operations in Regions’ footprint such as Wells Fargo, Bank of America, Sun Trust or BB&T.”