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State and federal regulators on Wednesday called their $200 million settlement with Regions Financial Corp. over improper fund-valuation practices at its Morgan Keegan & Co. brokerage a victory for investors.
June 22 -
Both companies made progress cleaning up their books and retooling business lines, but they're finding weakness in asset quality and the overall recovery to be especially stubborn.
January 25 -
Though the reform bill wending its way through Congress will have little direct impact on regional banks' capital markets business, it could spur more competition from larger rivals.
June 4 -
Senior managers at Morgan Keegan & Co. argue that their restructuring moves last week are a break with the past — and a sign that the securities unit still has a future with its parent company, Regions Financial Corp.
March 19 -
It's been a tough few weeks for Morgan Keegan. The Memphis brokerage unit of Regions Financial recently lost big in two arbitration cases and failed to get a court order blocking discovery in a state court case brought by the retirement system for Louisiana's firefighters, which allegedly lost nearly $50 million by investing in Morgan Keegan bond funds.
March 9
For once, time seems to be on Regions Financial Corp.'s side.
The Birmingham, Ala., bank may still be lagging its peers in terms of credit quality and profits, but in shopping around Morgan Keegan & Co., its investment bank subsidiary, Regions appears to have the upper hand.
Analysts said it's unlikely that a sale of the unit is imminent, but all told, Regions needn't be in a rush.
"Morgan Keegan is recognized as being a pretty good company, and they make money," said Kevin Fitzsimmons, a managing director at Sandler O'Neill. "I wouldn't call it a distressed sale from the standpoint of the object being sold.
"I don't get the impression that there's a time urgency to it," Fitzsimmons added. "It's something that they've been looking at for a while."
Marty Mosby, of Guggenheim Securities LLC, agreed, saying there's no immediate need for cash that would force a quick sale. Rather the announcement is a nod to the bank's long-term capital plans, he said. However, excessive delay would run the risk of leading to employee detections, he said.
The bank has been stressing for months that it's undertaken a renewed focus on its core banking franchise as it works to return to sustainable profitability, and eventually, repay the $3.5 billion in government bailout funds it still owes.
As such, Region's announcement Wednesday that it had retained Goldman Sachs Group Inc. to help it explore strategic options for the brokerage may have been more of a formality than anything else.
The timing of the announcement coincided with a settlement agreement Morgan Keegan reached with federal and state regulators related to issues concerning certain mutual funds and closed-end funds, a business that Morgan divested in 2008.
As part of the settlement, Morgan Keegan and Morgan Asset Management agreed to pay $210 million, of which $200 million will be placed into two Fair Funds for the benefit of investors.
With the settlement behind it, the bank now has more flexibility "to explore opportunities that are consistent with our strategic and capital planning initiatives," said Grayson Hall, the bank's president and chief executive, in a press release.
(The company said Morgan Asset Management and Regions Morgan Keegan Trust will not be put on the block.)
Regions bought Morgan Keegan in 2001 for $789 million, in the midst of a decade-long acquisition spree. The deal was to bring Regions new capabilities in brokerage services, fixed income, asset management, investment banking, capital markets and mergers and acquisitions advisory — not to mention cross-selling opportunities.
Today, the full-service brokerage and investment bank is decidedly much larger and more pervasive than when Regions acquired it. The number of locations has grown six-fold, to more than 300, in 20 states.
But while that business has expanded, so have Regions' problems. The bank has suffered big losses, due to its sizable exposure to hard hit markets in the Southeast.
Though it has made progress in trimming expenses and shedding bad assets, and has posted back-to-back profits in the two most recent quarters, the bank's credit quality still lags some of its peers.
Regions has also held on to federal bailout funds much longer than other regional banks of its size. Hall has said the $132 billion-asset bank must first return to sustainable profitability and show a substantial improvement in credit before repaying the $3.5 billion it still owes the government. But a sale of Morgan Keegan would no doubt give it a capital boost that theoretically could help spur repayment of the bailout funds.
Though Morgan Keegan is in a position of relative strength, there are other factors that could prevent a quick sale. For one, it's a fairly rare occurrence for broker-dealers to change hands, and as such, it's difficult to price such a deal, Fitzsimmons said.
Conventional wisdom though is that such businesses are valued at between one and two times their annual revenue, said Mosby. Morgan Keegan's 2010 gross revenue was around $1.3 billion, though that includes the trust and asset management businesses that Regions intends to retain. An expected pick up in M&A activity should help bolster the unit's asking price, Mosby said.
What's more, analysts see the pool of potential buyers as limited, though other broker-dealers or private equity firms are plausible acquirers.
While there aren't that many banks that want to get into the broker dealer business, "you do have some like a Wells Fargo, for instance, that might want to look into this," Mosby said.
Ultimately though, Regions may not want to prolong a deal interminably. Given Morgan Keegan's reliance on its staff, the bank will likely not want to extend the sale any more than it has to, Mosby said.
"You need to get that taken care of so the uncertainty around employees gets behind you quickly," he said.
