The jewel of Nicholas Schorsch's empire is reportedly being shopped as RCS Capital, or RCAP, continues to struggle.
Speculation about the future of Cetera Financial Group heated up last week, with one report claiming the nation's second-largest broker-dealer network is for sale.
Citing anonymous sources, Bloomberg News reported last Monday that RCS Capital, or RCAP, was seeking at least $700 million for Cetera, its main operating unit, and had hired Lazard Ltd. to find potential suitors.
Former nontraded real estate investment trust czar Nicholas Schorsch built Cetera, which has 9,500 advisers, through a series of acquisitions over a two-year period, starting in June 2013. Altogether, he paid about $1.5 billion for the firms that make up the Cetera network.
DEEP IN DEBT
RCAP is struggling. It has $800 million in long-term debt and its stock has plummeted more than 90% over the past 12 months. Last Friday, its shares were trading at $1, compared with $19.24 a year earlier.
RCAP's stock plunged after it was caught up in the fallout from another company Mr. Schorsch controlled, American Realty Capital Properties Inc., now named Vereit Inc. In October 2014, the company revealed it intentionally had not reported a $23 million accounting error over the first half of last year.
RCAP's financial condition has effectively eliminated any chance it may have had to raise more cash by selling stock or debt, noted one industry observer.
“Currently, RCAP is not generating enough earnings to pay dividends on its preferred and convertible preferred shares,” said Gordon Yale, a forensic accountant.
RCAP's net income for the six months ended in June was $20.9 million, with some $9.1 million of that attributable to non-controlling interests, Mr. Yale noted. RCAP's preferred dividends and deemed dividends were $204.3 million for the same period, resulting in a net loss attributable to Class A common shareholders of $192.5 million.
SOURCE OF CASH
“These are not exactly great numbers for additional issuances of common stock, and the share price reflects it,” he said. “So, the next ready source of cash is to sell off assets.”
There is no doubt RCAP is trying to figure out its future and has hired Lazard as part of those efforts. But is Cetera up for sale?
RCAP spokesman Andrew Backman declined to comment on the Bloomberg report. Instead, he said in an email “the board of directors of RCS Capital is exploring options to raise significant capital to rationalize the RCS capital structure.”
He added: “These efforts are focused on positioning the business for growth and long-term value creation for all stakeholders supported by Cetera's market-leading position. The company has engaged Lazard in connection with these efforts.”
RCAP is remaking itself and recently has been raising capital and cutting costs. In August, it sold its wholesale business, Realty Capital Securities, for $25 million to private- equity manager Apollo Global Management. Cetera is also cutting staff and eliminating its current team of due diligence analysts and replacing them with another group it controls, SK Research.
RCAP chief executive Michael Weil, Apollo senior managing director Marc Rowan and Realty Capital Securities CEO Bill Dwyer conducted a conference call last Tuesday, the day after the Bloomberg report came out, with advisers at Cetera and other firms that sell Realty Capital Securities products to investors. Part of the call was to reassure advisers that Apollo had a strong interest in Cetera and that the retail sales force had value that was currently not realized, said one Cetera adviser who asked not to be named.
When Apollo bought Realty Capital Securities, it announced a “strategic relationship” with Cetera in which its advisers would sell Apollo investment products. Apollo also said it was going to buy $25 million of preferred RCAP stock and two of its senior executives would be joining the RCAP board.
“The message was, Apollo has worked with and helped companies in the past and is not interested in a fire sale,” said the adviser. “Apollo thinks [Cetera] is well undervalued.”
Meanwhile, one analyst, Bill Katz of Citigroup, questioned the low price for Cetera cited in the Bloomberg article. He did not, however, rule out that RCAP is looking at its options, including selling more stock, particularly as the company's share price has recently tanked.
MISGUIDED ARTICLE
“While we do believe RCAP is likely pursuing various options to deal with tightening liquidity and high debt load, we believe the article is likely misguided in two key dynamics,” Mr. Katz wrote. “If correct, the $700 million would suggest RCAP's common equity value is essentially worthless, considering the firm has $850 million in debt and another $300 million in preferred equity. Considering RCAP paid $1.15 billion for Cetera, we find it unlikely that the firm would look for such a "fire sale' that would ostensibly "zero out' common equity holders.”
A sale of Cetera at $700 million would leave RCAP in a hole, Mr. Katz noted. A transaction at that price would leave RCAP with $150 million in debt and $300 million in preferred equity against business units that generated just $28 million in second quarter EBITDA, or earnings before interest, taxes, depreciation and amortization, Mr. Katz noted.
“We continue to believe an equity raise could be a likely outcome,” Mr. Katz noted. “We would not rule out a partial sale of the retail platform, but given RCAP hired a banker, we suspect an auction process might ensue.”
