Peregrine, SA's biggest stockbroker, could soon be black-owned
SA’s largest stockbroker Peregrine could soon be majority black-owned, and if approved, the nearly R1bn deal would be a big step forward for transformation in financial services.
On Wednesday Legae Securities and Peregrine Securities announced the formation of a black economic empowerment consortium, which had offered R910m in cash for a 65% stake in Peregrine Securities, currently held by Peregrine Holdings.
Management at Peregrine Securities would retain its 35% stake in the business. The deal would be a considerable win for transformation in stockbroking, and by implication asset management, in the country, particularly given the considerable size of Peregrine Securities.
Its equities division was ranked the biggest trading service provider by volume and value on the JSE’s equities market for the five months to May, executing trades in excess of R552bn, JSE figures show.
This puts it ahead of rivals Citigroup, JP Morgan Equities SA, RMB Morgan Stanley, Investec Securities and SBG Securities. In 2017, Peregrine Equities processed trades of R1.1-trillion, second only to RMB Morgan Stanley at R1.3-trillion — roughly a quarter of SA’s GDP.
"There have been many black entrants to the country’s financial services market, but as a collective the group’s annual share of JSE value traded was less than 5% in 2017," said Fatima Vawda, chairwoman of Legae Securities and MD of 27Four Investment Managers.
27Four publishes an annual survey, BEE.conomics, tracking transformation in the asset management industry. Its most recent survey found that black-owned fund managers managed just 9% of SA’s R4.6-trillion privately managed savings and investment assets.
Legae Securities became the first black-owned and managed stockbroking firm registered with the JSE in 1996.
If successful, the deal would merge the two businesses under the name Legae Peresec.
"The sale follows our strategy of being in low-capital, high-dividend and high-return-on-equity businesses," CEO of Peregrine Holdings, Robert Katz, told Business Day on Wednesday.
Peregrine’s share leapt 5.95% to close at R21,18, suggesting that the sale, which rounds out a right-sizing of the group, could prompt a rerating in the stock. Allan Gray was among the buyers and now holds just over 10% of the company. Founders, management and staff hold 20.42%.
Announcing earnings for the year to March 2018, Peregrine said "solid results" from its operating businesses, which include asset manager Citadel and hedge fund Peregrine Capital, allowed it to announce a 10% dividend increase.
If the sale of its securities division receives regulatory approval, Peregrine will be left with a collection of capital-light, cash-generative businesses.
It sold its private equity assets about six years ago and in 2017 transferred non-operating assets — including proprietary investments worth some R1bn that introduced volatility into earnings — to Sandown Capital.
Sandown Capital was separately listed on the JSE in November 2017.
"We do believe the share is very cheap," said Katz, adding that Peregrine could pay out an even more substantial dividend without the securities business.
The majority of the proceeds of the sale would be returned to the market, either through a special dividend or share buy-backs, said Katz.
The group would also look to redeem some of the debt it had incurred to capitalise the securities business to the tune of R250m in 2017, and would keep some aside for a "war chest", Katz said.
Peregrine would be getting nine-times historic earnings for its securities business, which was "quite disappointing", said Harry Botha, an analyst at Avior Capital Markets.
"It’s a tough environment for hedge funds and prime broking at the moment," Botha said.
The deal values the securities business, which posted a 23% decline in earnings to R89m over the year, at R1.4bn.
The sale would reduce head office costs and mean that Peregrine could pay out more in dividends, Botha said.
"We feel we got a fair price," Katz said.
Peregrine declared a dividend of R1.70 per share, which is 10% ahead of the previous year.