During tough times in the City of London, it is better to drink with company than drown sorrows alone. Cenkos Securities and FinnCap, two well-known names in the UK’s clubby small-cap broker world, intend to share the tab after agreeing to a £43mn all-share nil premium deal on Thursday.
No wonder they seek strength in numbers. The industry battles some of the harshest conditions in memory. Total money raised on London’s junior Aim market dropped to a 20-year low last year. New issues fell to the lowest since AIM’s creation in 1995.
The deal, through which Cenkos investors will receive 3.19 new FinnCap shares for each of their existing stock, is a defensive move against the depressing market backdrop. Revenues and profitability at both companies have collapsed. Including expected dividends FinnCap will own 50.1 per cent of the pro forma total.
Cenkos fell to a £2.7mn loss last year after a 46 per cent collapse in revenue to £20.3mn. FinnCap has yet to publish its full-year results. In the six months to September 30, it made an adjusted pre-tax loss of £0.6mn on revenue of £16.4mm, down nearly half year on year. While listed rivals Peel Hunt and Numis Securities have not been immune to the market downturn, both remained profitable last year.
For FinnCap a merger is preferable to a potential takeover. It rebuffed last year’s approach from Panmure Gordon, led by ex-Barclays Capital banker Rich Ricci. Competition concerns could yet be a risk. Combining their client books would easily hand the new company the greatest number of brokerage clients on Aim, according to Adviser Rankings.
A roll-call of venerable City financiers who own shares in the two have already offered their blessing to the marriage. These include Jim Durkin, one of Cenkos’s founding shareholders and its former chief executive and, on the FinnCap side, British venture capitalist Jon Moulton.
Given the recent turmoil in equity markets, Cenkos and FinnCap may not be the only small-cap brokers to elbow up together to the bar this year.
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