Standard Chartered buys Cazenove Asia

Standard Chartered Bank (Hong Kong), a subsidiary of Standard Chartered, will buy 100% of brokerage firm Cazenove Asia on financial terms which have been withheld. The deal, which is subject to regulatory approvals and is expected to be completed in the first quarter of 2009, strengthens Standard Chartered's position across the spectrum of equities products.

Cazenove is a British brokerage firm whose origins can be traced back to 1823. It opened its first Asia office in Hong Kong in 1974, the same year it became a member of the Hong Kong Stock Exchange. In addition to Hong Kong it currently has offices in New York, London, Singapore, Shanghai and Beijing.

In November 2004, J.P. Morgan and Cazenove Group announced an agreement to combine Cazenove's investment banking business and J.P. Morgan's UK investment banking business in a new company to be owned jointly and called JPMorgan Cazenove. Cazenove's Continental European and Asian businesses were included within the purview of the partnership but continued to operate under the Cazenove brand. The transaction was structured to enable Cazenove Group to release capital from its balance sheet and allow it to make a capital repayment of an estimated ú340 million ($520 million at today's exchange rates) to its shareholders.

At the time, Cazenove Asia took pains to reassure its customers and clients that the firm would retain its independence in Asia and that effectively nothing would change except that Cazenove would be supported and owned by a bank with a much larger balance sheet.

Cazenove Asia now has a team of 30 research analysts based in Hong Kong and Singapore covering more than 250 Asia-listed companies, and 24 sales people and sales traders servicing more than 700 institutional clients worldwide. In total, Standard Chartered says it is taking on around 150 Cazenove staff in the region including 42 corporate finance bankers, most of whom speak Mandarin.

Since 1997, Cazenove Asia has been involved in 218 transactions valued at over $98 billion. As of December 31, 2007, it had assets of approximately $159 million.

Standard Chartered said it intends to leverage Cazenove's equity financing and execution abilities to strengthen its equity capital markets business, continuing a strategy the bank has already adopted with the acquisition of UTI Securities in India and the creation of Standard Chartered Securities in Korea.

On a call arranged by Standard Chartered to discuss the acquisition, the bank's Asia head, Jaspal Bindra, said the deal adds a suite of complementary product capabilities to Standard CharteredÆs product offering and is highly synergetic. ôThe capabilities the Cazenove team adds will make Standard Chartered more competitive in China,ö emphasised Bindra.

He also said that CazenoveÆs Asia team was highly excited about the deal.

The enthusiasm was reaffirmed by May Tan, CEO of Cazenove Asia, who said in an interview with FinanceAsia: "I think this [deal] will work and it is something I very much want to be part of." Tan will continue to lead the charge at Cazenove Asia after the takeover.

CazenoveÆs team of employees had been facing some uncertainty regarding the future of the firm as there is an overlap between the J.P. Morgan offering and what Cazenove does. This may have made sense when markets were booming as the two firms concentrate on different segments, say sources, but in a downturn the situation was becoming tricky.

"It was a case of finding the right shareholder with the right fit to preserve the franchise and make sure people are well looked after," adds Tan with respect to the takeover by Standard Chartered. "We have no plans to reduce headcount as there is no duplication [between the two businesses].ö

From Standard CharteredÆs side, Sean Wallace, group head of corporate finance, reinforced the point about staffing. He did not disclose details of any retention bonuses offered to Cazenove staff but said all staff would be absorbed, efforts were underway to hold them and the intention was to continue to grow the Cazenove business organically.

Both Standard Chartered and Tan alluded to the many years of working together that they have shared û among other things, Cazenove Asia was involved in the listing of Standard Chartered in Hong Kong in 2002 û making them confident that the cultural fit between the firms is high.

The Cazenove brand will be transitioned out by Standard Chartered over the next 12 months.

Standard Chartered is funding the deal from internal resources. The deal "is immediately knowledge and management accretive,ö replied Bindra, when asked when the transaction would be EPS accretive.

Standard Chartered is listed on both the London Stock Exchange and the Hong Kong stock exchange and has operated for over 150 years, primarily across Asia, Africa and the Middle East. It derives 90% of its operating income from the three regions. Over the past five years it has doubled its income and headcount through organic growth supplemented by acquisitions.

On the media call, reporters questioned the Standard Chartered team about how the deal was struck and whether it was initiated by J.P. Morgan or Standard Chartered. The team, which also included Vincent Van Pelt, global head of equity derivatives and commodities, did not provide a direct answer and instead alluded to the fact that J.P. Morgan is the firmÆs corporate broker in the UK, thus there is an ongoing dialogue between the two.

The answer may lie in the deal struck between J.P. Morgan and the Cazenove Group in 2004. Under the terms of the agreement, the ownership structure would be reviewed after an initial period of five years when J.P. Morgan would have a call option to buy the remainder of the partnership from Cazenove, and Cazenove would have a put option to sell its stake in the partnership to J.P. Morgan. The two partners may have decided to develop a mutually acceptable solution before the expiry of the five-year options.

Media has been speculating that Standard Chartered could be doing due diligence on the Asia assets of the Royal Bank of Scotland Group.

ôStandard Chartered is in a fortunate position as we are not distracted by holes in the business,ö replied Bindra in response to a question about whether Standard Chartered would continue to evaluate acquisition opportunities. ôWe remain open for further deals.ö