There has been fevered speculation surrounding the future of Hartleys. Mark Beyer sorts through the rumours.
THE linkage may seem obscure, but Westpac’s acquisition of BT Financial Group last year could have a critical bearing on the future of Hartleys.
The BT acquisition deepened the links between Westpac and Hartleys.
Specifically, it gave Hartleys’ JDV technology business a critical role in the success of both Westpac’s online broking business and BT’s $6.5 billion wrap platform.
While JDV could possibly survive as an independent business, market watchers believe a sale is much more likely.
If so, Westpac must be considered a logical buyer.
This is likely to be one of the options the Hartleys board and its acting chief executive Tony Howarth will look at over coming months.
The board is also assessing options for Hartleys’ core wealth management business, including a possible management buy-out.
This option has taken a step forward with Ernst & Young Corporate Finance being appointed this week by senior staff to advise on an MBO.
A trade sale has been touted as another option, but the reality is that existing shareholders, led by Westpac and Royal Bank of Canada, may have to grit their teeth and hang on.
The depressed market conditions mean there is little value in stock-broking firms.
Macquarie Equities, which was rumoured to have been conducting due diligence on the wealth management business, has denied being interested.
Peter Maher, Sydney-based head of Macquarie Financial Services Group, said his main interest was in Hartleys’ $140 million margin lending loan book, which is also up for sale.
“We’re certainly not interested in buying the business,” he said.
“No interest” was his response when asked if Macquarie may purchase parts of Hartleys’ wealth management business.
Mr Howarth and Hartleys’ corporate advisers, Gresham Partners, are currently evaluating proposals to buy the margin lending book.
Mr Howarth said he was aiming to complete the sale process by the end of April.
It remains to be seen whether Macquarie’s public comments on the wealth management business are part of a bargaining game.
Macquarie bought the CIBC and BNP Paribas broking teams 18 months ago.
A key challenge for trade buyers would be their ability to lock in all of the top dealers.
The latest firm to encounter this problem was Bell Potter, which bought Challenger First Pacific early this year but lost 20 per cent of its dealers.
A preliminary MBO proposal put to the board last week was on behalf of a group of senior staff, including head of corporate finance Richard Simpson and top dealers John Featherby, Ian Parker and George Georgiadis.
Reports that the MBO proposed a buying price of just $1 for the WA business have been described as “way off the mark” by a source close to the proposal.
They have also played down suggestions that the senior dealer group had threatened to leave unless their proposal was accepted.
“That’s rubbish as well,” the source said.
A key issue in any MBO negotiations would be whether the WA staff could excise a slimmed down, Perth-based niche business from the current Australia-wide wealth management division.
Another key issue would be the ability of staff (and possibly other investors) to subscribe sufficient capital to support their trading and underwriting activities.
John Poynton, who ran Hartleys in the early 1990s, has played down speculation he could return to the fray.
“I haven’t been approached, but if there were any interest, it would only be as an investor,” Mr Poynton said.
He said he was contractually committed to running his current corporate advisory business, Poynton & Partners, until June 2004.
The logic of Westpac buying JDV stems from the close links between the two organisations.
Westpac is already a substantial 28 per cent shareholder in Hartleys. In addition, JDV provides the critical back-end processing for Westpac Broking, which is Australia’s second largest online broker (behind Common-wealth Securities) with a market share of 12 per cent.
JDV also provides back-end processing for BT’s wrap platform, which has $6.5 billion under administration and is widely regarded as one of Westpac’s key growth vehicles.
These linkages give Westpac a greater financial and strategic interest in the future of JDV than any other party.
While other bidders may potentially offer a higher price for JDV, Westpac would need to be assured that a new owner would continue to run JDV is a manner that suits its commercial interests.
As well as Westpac/BT, JDV provides back-end processing for Suncorp Metway and Quicken.
In addition, Macquarie uses JDV software and technology in its stockbroking and margin lending services.
Apart from Westpac, companies that have a strategic fit with JDV and are therefore possible bidders include Sanford and IRESS.
Sanford provides a similar range of services to JDV, with current clients including National Australia Bank and BankWest.
The provision of back-end broking services to two of the big four banks (National and Westpac) could be a barrier to such a deal proceeding.
A larger barrier could be the state of play at Sanford, which is the subject of a takeover bid by IWL and has limited cash resources and unstable executive leadership.
Once Sanford (or its new owner) resolves these issues, it would be well placed to look at the JDV business.
IRESS Market Technology has been touted as another bidder. While managing director Peter Dunai said he could not rule out a bid, he played down the prospect.
“There has been no consideration of anything like that,” Mr Dunai said. “Its not something we are focused on at the moment.”
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