Brewin Dolphin share price leaps on RBC takeover deal

A robust wealth management market in the UK has provided an attractive foundation for RBC to agree on a £1.6bn deal to acquire Brewin Dolphin. News of the deal sent shares in the UK wealth management firm up 61%, while Canada’s financial services company dipped 1.6%. Analysts expect to see further consolidation in the market off the back of the deal.

The Brewin Dolphin [BRW.L] share price saw one of its biggest single day price surges after the announcement that Royal Bank of Canada (RBC) [RY.TO] will buy the firm for £1.6bn, or 515p per share.

Shares in the wealth management firm leapt from 318p to reach a fresh 52-week high of 512p at the close on 31 March, soaring 61%. In contrast, RBC’s share price dipped by 1.6% in reaction to the news.

Doug Guzman, group head of RBC Wealth Management, said the deal, which is expected to be completed at the end of the third quarter, would merge Brewin with its existing UK wealth business and propel it to a number three position in the UK and Ireland wealth management market.

RBC predicted it would see an earnings per share (EPS) boost of around 1% in the first year, with the combined group generating a compound annual growth rate (CAGR) of 9% for revenue over the medium term.

The merged group will have around £64bn of assets under management, according to Bloomberg, and based on 2021 earnings, a combined annual revenue of £545m.

RBC set to trim back Brewin’s business

Analysts had mixed reactions to the deal. Peel Hunt said it expects to see “some limited headcount reductions” as the combined group looked to save costs. This does look to be a factor concerning the company’s strategy for the acquired entity, with RBC saying that it had already “identified some potential overlap in roles mainly in functional and administrative areas, which may lead to limited headcount reductions”.

Despite the cost cutting strategy, Guzman was bullish about the deal. “The UK is a key growth market for RBC, and Brewin Dolphin provides us with an exceptional platform to significantly transform our wealth management business in the region… By combining two highly complementary businesses, we will increase the depth and breadth of our services,” he said.

For Robin Beer – CEO of Brewin Dolphin, which had a network of more than 30 offices and possessed assets under management of £55bn at the end of February — it is important for the group to maintain long-standing client relationships. “As part of RBC, we would be able to provide our clients with a broader range of products and services, and expand our distribution channels through leveraging RBC’s global presence.”

Booming UK wealth management market

The attractiveness of the UK wealth management market is growing. According to figures from the City of London, the UK is the second-largest wealth management centre in the world, worth $1.79trn. Around 2.4 million people in the UK use wealth managers for retirement, investment and tax advice.

A recent Aviva survey revealed that the UK wealth market is expected to grow 7% a year to reach £2.1trn by 2024. The sector has been boosted in recent years by pension freedoms, an ageing population, greater awareness of wealth management and financial services, and digital technology such as robo-advisers. More complex tax and pension regulations have also led to growing numbers of people seeking advice.

But the rising costs of technology and compliance regulation has also led to more consolidation in the sector. Examples include Tilney merging with Smith & Williamson in 2020, and Canaccord Genuity Wealth Management buying the private client investment business of Scottish private bank Adam & Co from the NatWest Group in 2021. Raymond James also bought UK wealth manager Charles Stanley for £278.9m last July.

Analysts forecast continued consolidation

Analysts at Jefferies, according to a Reuters report, said the premium paid by RBC “demonstrates the attractiveness of the UK wealth market, with long-term, stable income streams and the potential for growth and higher operating margins”.

As reported inFT Adviser, Peel Hunt analyst Stuart Duncan said the deal “underpins the value of the sector because it will continue to consolidate… Wealth management has good long-term structural growth prospects”.

Given the wealth management market’s attractiveness, which companies are seeing growing investment interest? Investment management firm Brooks Macdonald [BRK.L] saw its share price climb 12.4% between 28 March and 31 March, while shares in investment management firm Rathbones Group [RAT.L] have risen 15.9% since 30 March to the close on 1 April.