REG - Close Bros Grp PLC - Close Brothers Agrees Sale of CBAM

Close BrothersAnnouncement

19/09/2024 07:00

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RNS Number : 8470E  Close Brothers Group PLC  19 September 2024

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OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE
RELEVANT LAWS OF SUCH JURISDICTION

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

 

FOR IMMEDIATE RELEASE

 

19 September 2024

 

Close Brothers agrees sale of Close Brothers Asset Management to Oaktree

 

Close Brothers Group plc ("the group" or "Close Brothers") has agreed to sell
its wealth management business, Close Brothers Asset Management ("CBAM"), to
funds managed by Oaktree Capital Management, L.P. ("Oaktree") for an equity
value of up to £200 million (the "Transaction").

 

Transaction Highlights

 

·    The equity value of up to £200 million, including £28 million of
contingent deferred consideration in the form of preference shares, represents
a multiple of 27 times CBAM's statutory operating profit after tax for the
2024 financial year 1 

·    Close Brothers intends to retain all upfront cash proceeds from the
Transaction of approximately £172 million 2 . The Transaction will strengthen
the group's capital base and improve its position to navigate the current
uncertain environment

·   The Transaction is expected to complete in early 2025 calendar year
and is conditional upon receipt of certain customary regulatory approvals

 

Mike Biggs, Close Brothers' Chairman, commented:

 

"Following a comprehensive strategic review, the Board is pleased to announce
the agreed sale of CBAM to Oaktree. The transaction is expected to increase
the group's common equity tier 1 capital ratio by approximately 100 basis
points, marking significant progress towards the plan we outlined in March
2024 to strengthen our capital base. The Board has unanimously approved the
transaction and believes that the agreed sale represents competitive value for
our shareholders, allowing us to simplify the group and focus on our core
lending business. CBAM has delivered impressive growth over the past years and
has developed into a strong franchise. Under the new ownership, it will
benefit from additional resources to accelerate its growth trajectory. I would
like to thank our CBAM colleagues for their dedication, professionalism and
exceptional service to our clients."

 

Federico Alvarez-Demalde, Oaktree Managing Director commented:

 

"We are delighted that Close Brothers chose to partner with us on this
important transaction. We have observed CBAM's progress over several years and
hold the franchise in high regard. The business is well known for its client
centric culture which we absolutely intend to preserve and nurture as we
invest in its service capabilities and technology to build a vertically
integrated UK wealth business of scale. In the coming months we will bring to
bear our extensive operational experience in the sector to work closely with
Close Brothers and ensure a successful separation and transition of the
business."

Strategic Benefits of the Transaction

 

CBAM is a well-regarded UK wealth management franchise with a strong track
record, healthy net inflows and significant growth potential. To realise the
potential value of the business in the medium-term to the fullest extent
possible, Close Brothers would need to continue to invest to accelerate CBAM's
growth strategy in the short and medium term, including via acquisitions
against a consolidating market backdrop.

 

Selling its wealth management division at this stage allows Close Brothers to
realise a competitive valuation for CBAM and strengthen Close Brothers'
capital position. The Transaction also allows the group to focus its resources
on its core lending business, where it continues to see good growth prospects
and encouraging customer demand.

 

The Transaction will enable CBAM to accelerate its growth strategy under
Oaktree's ownership, which recognises CBAM's value and its potential to become
a leading UK wealth manager of scale. In order to achieve this, Oaktree
intends to provide CBAM with the incremental investment required to increase
its profitability and presence in the wealth management sector.

 

Following the Transaction, the group will remain focused on executing its
strategic objectives for the retained businesses. The group's key priorities
in this respect include:

 

·    Protecting the group's valuable franchise by further progressing the
initiatives previously outlined to strengthen our capital position in the
current uncertain environment

·    Maintaining the strengths of the group's business model, being our
long-term relationships, the extensive expertise of our people and our
customer-centric approach

·    Continuing to focus on the prudent management of our financial
resources, by retaining our strong capital, funding and liquidity position

·    Maintaining our consistent and disciplined pricing and underwriting
criteria, which underpin the quality of the group's loan book

·    Progressing further our tactical and strategic cost management
initiatives, as well as the additional cost actions mobilised in March 2024

·    Continuing to explore diversifying revenue streams and growth
opportunities at Winterflood, whilst ensuring the trading business remains
well positioned to benefit when investor appetite returns

 

The group remains focused on resuming our track record of earnings growth and
attractive returns in our core business and is well positioned to take
advantage of future opportunities.

 

Net Proceeds and Use of Proceeds

 

Under the terms of the Transaction, the equity value of up to £200 million
includes:

·    £172 million of cash to be paid at or before completion of the
Transaction ("Completion"), comprising

§      an upfront cash consideration of approximately £146 million
payable by Oaktree to Close Brothers on Completion; and

§      a dividend of approximately £26 million payable by CBAM to Close
Brothers on or before Completion, subject to applicable regulatory capital
requirements; and

·    £28 million of contingent deferred consideration in the form of
preference shares.

 

Close Brothers intends to retain the cash received by Completion, expected to
amount to approximately £172 million, gross of transaction costs.

 

Further details on Contingent Deferred Consideration

 

The contingent deferred consideration will be in the form of preference
shares, redeemable no later than Oaktree's exit, for an amount of up to £28
million plus interest at a rate of 8 per cent. per annum, stepping up to 12
per cent after five years. The deferred consideration is subject to potential
deductions, including in relation to retention of key individuals and certain
potential regulatory costs and separation cost overruns.

 

Impact on Close Brothers

 

Financial impacts of the Transaction on Close Brothers are currently expected
to be (based on financials as at 31 July 2024) as follows:

·    The upfront proceeds would increase the group's common equity tier 1
("CET1") capital ratio by approximately 100 basis points on a pro forma basis.
This calculation is based on a net asset value of £121.8 million at 31 July
2024, a tangible net asset value of £66.1 million, and assumes an immediate
reduction in credit risk weighted assets ("RWAs") associated with the CBAM
business. It does not include any immediate reduction in operational risk RWAs
and excludes any capital impact in respect of the contingent deferred
consideration. This estimate is subject to change before Completion.

·    The accounting treatment and associated capital impact of the
contingent deferred consideration remains under review.

·    Close Brothers' pro forma operating profit before tax for the 2024
financial year would be £131.0 million (representing a £11.0 million
adjustment)

·    Close Brothers' pro forma total assets as at 31 July 2024 would be
£13,889 million (representing a £192.0 million adjustment)

·   Close Brothers' pro forma total liabilities as at 31 July 2024 would
be £12,168 million (representing a £70.2 million adjustment)

 

Assets of CBAM

 

As at 31 July 2024, the value of the gross assets of CBAM was £192.0 million.
In the 2024 financial year, the profit after tax attributable to the assets
the subject of the Transaction were £7.4 million.

 

Board Recommendation

Close Brothers' Board has unanimously approved the Transaction and believes
the terms of the Transaction are in the best interests of Close Brothers and
the group's shareholders as a whole.

 

Next steps/Timing

The Transaction is expected to complete in early 2025 calendar year. The
Transaction is conditional upon receipt of certain customary regulatory
approvals.

 

Additional Information

The Transaction is being treated as a significant transaction as per UK
Listing Rules due to the agreed maximum total consideration receivable
comprising 25.2% 3 of Close Brothers' market capitalisation, which is in
excess of the 25% threshold. As such this announcement is made in accordance
with Close Brothers' disclosure obligations pursuant to Chapter 7 of the
Listing Rules.

Unless otherwise stated, all financial information relating to Close Brothers
and CBAM disclosed in this announcement (including the Appendices) has been
extracted, without material adjustment, from Close Brothers Group's Full-Year
2022 and Full-Year 2023 published audited financial statements and the
unaudited Preliminary Results for the year end to 31 July 2024, on the bases
and assumptions set out therein.

The person responsible for arranging for the release of this announcement on
behalf of Close Brothers is Sarah Peazer-Davies, Company Secretary.

 

About Close Brothers

 

Close Brothers is a leading UK merchant banking group providing lending,
deposit taking, wealth management services and securities trading. We employ
approximately 4,000 people, principally in the United Kingdom and Ireland.
Close Brothers is listed on the London Stock Exchange and is a constituent of
the FTSE 250.

 

LEI: 2138001S47XKWIB7TH90

 

About CBAM

 

CBAM, wholly-owned subsidiary group of Close Brothers, is a vertically
integrated UK wealth manager, providing personal financial advice and
investment management services to private clients in the UK. CBAM operates out
of 15 offices with more than 150 investment professionals and c.870
employees. CBAM's offering includes full bespoke management, managed
portfolios and funds, distributed both directly via in-house financial
planners and investment managers, and through third-party financial advisers.

 

CBAM is led by Eddy Reynolds and overseen by its board of directors.

 

About Oaktree

 

Oaktree is a leader among global investment managers specialising in
alternative investments, with $193 billion in assets under management as of 30
June 2024. Oaktree emphasises an opportunistic, value-oriented and
risk-controlled approach to investments in credit, private equity, real assets
and listed equities. The firm has over 1,200 employees and offices in 18
cities worldwide. Given Oaktree's global reach and experience, it believes its
team has the required investment, operational, diligence and capital raising
expertise to effect a business combination with an attractive target and to
position it for long-term success in the public markets.

FOR FURTHER INFORMATION PLEASE CONTACT

 

 

For Close Brothers:

 

Investors and Analysts:

 

 Sophie Gillingham  Close Brothers  020 3857 6574
 Camila Sugimura    Close Brothers  020 3857 6577

 

 

Media:

 

 Neil Bennett    H/Advisors Maitland  07900 000777
 Sam Cartwright  H/Advisors Maitland  07827 254561

 

 

Goldman Sachs International (Financial Adviser to Close Brothers):

+44 207 774 1000

 

 Ronan Breen
 James Lucas
 Owain Evans

 

IMPORTANT NOTICES

 

No statement in this announcement is intended as a profit forecast and no
statement in this announcement should be interpreted to mean that the future
earnings per share, profits, margins or cash flows of Close Brothers following
the Transaction will necessarily match or be greater than the historical
published earnings per share, profits, margins or cash flows of Close
Brothers.

 

This announcement may include statements that are, or may be deemed to be,
"forward-looking statements". These forward-looking statements may be
identified by the use of forward-looking terminology, including the terms
"believes", "estimates", "plans", "projects", "anticipates", "expects",
"intends", "may", "will" or "should" or, in each case, their negative or other
variations or comparable terminology, or by discussions of strategy, plans,
objectives, goals, future events or intentions. Forward-looking statements may
and often do differ materially from actual results. Any forward-looking
statements reflect Close Brothers' current view with respect to future events
and are subject to risks relating to future events and other risks,
uncertainties and assumptions relating to Close Brothers' business, results of
operations, financial position, liquidity, prospects, growth and strategies.
Forward-looking statements speak only as of the date they are made.

You are advised to read this announcement in its entirety for a further
discussion of the factors that could affect the group's future performance. In
light of these risks, uncertainties and assumptions, the events described in
the forward-looking statements in this announcement may not occur.

 

This announcement does not constitute and should not be construed as, an offer
to purchase or sell or issue securities, or otherwise constitute an
inducement, invitation, commitment, solicitation or recommendation to any
person to purchase, subscribe for, or otherwise acquire securities in Close
Brothers, or constitute an inducement to enter into any investment activity in
any jurisdiction. Nothing contained in this announcement is intended to, nor
shall it, form the basis of, or be relied on in connection with, any contract
or commitment whatsoever and, in particular, must not be used in making any
investment decision.

 

The distribution of this announcement in or from certain jurisdictions may be
restricted or prohibited by the laws of any jurisdiction other than the UK.
Recipients of this announcement are required to inform themselves of, and
comply with, all restrictions or prohibitions in such other jurisdictions. Any
failure to comply with applicable requirements may constitute a violation of
the laws and/or regulations of such other jurisdictions.

 

Save as required by the Market Abuse Regulation, the Disclosure Guidance and
Transparency Rules, the UK Listing Rules or by applicable law, each of Close
Brothers, Goldman Sachs International and their respective affiliates and
representatives expressly disclaim any intention, obligation or undertaking to
update, review or revise any of the information or the conclusions contained
herein, including forward-looking or other statements contained in this
announcement, or to correct any inaccuracies which may become apparent whether
as a result of new information, future developments or otherwise.

APPENDIX I

FINANCIAL INFORMATION

 

Key Historical Financial Information on CBAM

 

 

 Balance Sheet 4 

                                                                       31-Jul-22  31-Jul-23     31-Jul-24
 Total Assets                                                          172.8      177.9         192.0
 Total Liabilities                                                     70.5       64.1          70.2
 Net Asset Value                                                       102.3      113.8         121.8
 Tangible Net Asset Value                                                                       66.1

 Income Statement 5 
                                                                       FY 2022    FY 2023       FY 2024
 Net Interest Income/ (Expense)                                        (0.7)      6.7           11.0
 Non-interest Income                                                   148.7      138.1         146.8
 Operating Income / (Expense)                                          148.0      144.8         157.8
 Administrative Expenses                                               (120.7)    (123.3)       (139.5)
 Depreciation and Amortisation                                         (5.6)      (5.5)         (6.1)
 Impairment Losses on Financial Assets                                 -          (0.1)         -
 Total Operating Expenses Before Amortisation of Intangible Assets on  (126.3)    (128.9)       (145.6)
 Acquisition
 Adjusted Operating Profit / (Loss)                                    21.7       15.9          12.2
 Amortisation of Intangible Assets on Acquisition                      (1.9)      (1.5)         (1.2)
 Operating Profit / (Loss) Before Tax                                  19.8       14.4          11.0

 

 

APPENDIX II

RELATED PARTY TRANSACTIONS

 

Save as disclosed in: (i) Note 22 on page 73 of Close Brothers' unaudited
Preliminary Results for the year end to 31 July 2024; (ii) page 238 of Close
Brothers'  2023 Annual Report; and (iii) page 186 of Close Brothers' 2022
Annual Report, the Company has not entered into any related party transactions
(within the meaning ascribed to that term in UK-adopted international
accounting standards) during any of the financial years ended 31 July 2022, 31
July 2023 and otherwise up to the date of this announcement.

 

APPENDIX III

SIGNIFICANT CHANGE IN THE ISSUER'S FINANCIAL POSITION

 

1. Close Brothers

There has been no significant change in the financial performance or financial
position of Close Brothers since 31 July 2024, being the end of the last
financial period for which financial information of Close Brothers has been
published.

 

2. CBAM

There has been no significant change in the financial performance or financial
position of CBAM since 31 July 2024, being the end of the last financial
period for which financial information of CBAM has been published. 6 

 

APPENDIX IV

LEGAL AND ARBITRATION PROCEEDINGS

 

1. Close Brothers

Save as set out below in relation to Novitas and in connection with the FCA's
review of motor finance commissions, related Financial Ombudsman, County Court
and Court of Appeal proceedings (as detailed in Close Brothers' 2023 Annual
Report and Preliminary Results for the year end to 31 July 2024), there are no
legal or arbitration proceedings (including any such proceedings which are
pending or threatened of which Close Brothers' is aware) during a period
covering the 12 months prior to the date of this announcement which may have,
or have had in the recent past, a significant effect on Close Brothers'
financial position or profitability.

 

The decision was made to wind down Novitas and withdraw from the legal
services financing market following a strategic review in July 2021, which
concluded that the overall risk profile of the business was no longer
compatible with our long-term strategy and risk appetite. As announced in H1
2023, Close Brothers has accelerated its efforts to resolve the issues
surrounding this business and continue to pursue formal legal action issued
against one of the After the Event ("ATE") insurers in November 2022. Close
Brothers is actively seeking recovery from a second insurer and entered into a
settlement with another smaller ATE insurer in July 2023.

 

2. CBAM

There are no legal or arbitration proceedings (including any such proceedings
which are pending or threatened of which Close Brothers is aware) during a
period covering the 12 months prior to the date of this announcement which may
have, or have had in the recent past, a significant effect on CBAM and/or
CBAM's financial position or profitability.

 

APPENDIX V

MATERIAL CONTRACTS

 

1.   Close Brothers

 

1.1 Transaction Agreements

 

(A) Share purchase agreement

 

Parties and structure

 

The Transaction is governed by the share purchase agreement ("Share Purchase
Agreement") entered into between Close Brothers, Close Brothers Holdings
Limited, the direct holding company of CBAM and Titan Holdco S.a r. I, a newly
incorporated, wholly-owned acquisition vehicle of Oaktree.  Pursuant to the
Share Purchase Agreement and subject to the Regulatory Conditions (as defined
below), Close Brothers Holdings Limited has agreed to sell and Titan Holdco
S.a r. I has agreed to purchase the entire issued share capital of CBAM (the
"Shares"). Following Completion, CBAM shall become a wholly-owned portfolio
company of Oaktree.

 

Conditions

 

The Transaction is subject to obtaining approval from the FCA and the Guernsey
Financial Services Commission (as one subsidiary of CBAM is incorporated in
Guernsey) in respect of the change of control of CBAM (the "Regulatory
Conditions").

 

Consideration

 

The consideration for the Transaction comprises of approximately £146 million
payable in cash at Completion and £28 million contingent deferred
consideration (the "Consideration").  As the Consideration is calculated
pursuant to a locked box mechanism under the Share Purchase Agreement, any
payments made by CBAM to Close Brothers between 31 March 2024 and Completion,
which were not previously approved by Oaktree, shall be deducted from the
Consideration at Completion.  The contingent deferred consideration will be
in the form of preference shares, redeemable no later than Oaktree's exit, for
an amount of up to £28 million plus interest at a rate of 8 per cent. per
annum, stepping up to 12 per cent after five years. The deferred consideration
is subject to potential deductions, including in relation to retention of key
individuals and certain potential regulatory costs and separation cost
overruns.

 

Warranties and indemnities

 

Close Brothers Holdings Limited has given customary fundamental warranties
relating to its title to the Shares. Close Brothers and Close Brothers
Holdings Limited have also given customary limited fundamental warranties
relating to capacity and solvency.

 

Warranty and indemnity insurance is in place in respect of the majority of
warranties given by Close Brothers and Close Brothers Holdings Limited under
the Share Purchase Agreement in relation to the CBAM business and Close
Brothers' liability in relation to those warranties is capped at £1.

 

Close Brothers has given certain indemnities in respect of potential pension
and regulatory risks which are not material in the context of the group.

 

 

Guarantees

 

Close Brothers has agreed to guarantee all of Close Brothers Holdings
Limited's obligations, commitments and undertakings arising under or in
connection with the Share Purchase Agreement.

 

Financing

 

Oaktree has received both equity and debt financing, including via minority
co-investors, in order to fund the consideration for the Transaction.

 

Governing law and jurisdiction

 

The Share Purchase Agreement is governed by English law. The English courts
will have exclusive jurisdiction to settle any dispute arising out of or in
connection with the agreement.

 

 

 

ENDS

 1  Calculated based on Operating Profit After Tax per Close Brothers'
Preliminary Results for the year end to 31 July 2024 published by Close
Brothers

 2  Comprising an upfront cash consideration of £146 million payable by
Oaktree to Close Brothers on Completion; and a dividend of approximately £26
million payable by CBAM to Close Brothers on or before Completion, subject to
applicable regulatory capital requirements

 3  Market capitalisation as of 18 September 2024 per Bloomberg.

 4  Extracted from Close Brothers' annual consolidated balance sheets for the
last three financial years, except for the Tangible Net Asset Value

 5  Extracted from Close Brothers' annual consolidated income statements for
the last three financial years

 6  This refers to Close Brothers' Preliminary Results for the year end to 31
July 2024 published by Close Brothers, which includes financial information of
CBAM

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