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'Disciplined' Rathbones applauded for Smith & Williamson decision

'Disciplined' Rathbones applauded for Smith & Williamson decision

Rathbones' decision not to get involved in a costly and potentially value destructive bid war for Smith & Williamson (S&W) has been applauded. 

In a statement issued after markets closed last night Rathbones said it had decided against a deal with S&W after 'very extensive due diligence and negotiations' 10 days after it announced its initial interest

The deal would have created a combined group valued at around the £2 billion mark with £55 billion worth of assets under management. 

In a statement issued shortly after the Rathbones one S&W confirmed the termination of talks, stating it was exploring a stock market listing instead. 

Both parties said they did not view the deal to be in the best interests of their respective shareholders. 

'The potential combination was intended to accelerate Rathbones' existing strategy, but ultimately we were unable to agree terms that offered our shareholders an appropriate balance of risk and reward,' Rathbones chief Philip Howell (pictured) said in a statement. 

With scale becoming increasingly important in wealth management and Tilney rumoured to be waiting in the wings to launch a rival bid, Shore Capital believes Rathbones has done the sensible thing. 

'The wording of the statement implies that the talks stalled over price,'  Shore Capital analyst Paul McGinnis said. 

'We applaud the discipline shown by Rathbones’ management in being willing to walk away from a deal where they felt it would be difficult to add value to shareholders.'

The collapse in talks was not without cost though, with Rathbones saying it will be hit with an exceptional charge of £5 million as a consequence. 

McGinnis noted this was a relatively small price to pay relative to any 'value destruction from overpaying on a potential £600 million deal'. 

However, Shore - which has a hold rating on Rathbones - expressed concern over the wealth firm's strong run since its £37 million equity raise in October 2016. 

Just after midday shares in Rathbones had barely moved on the S&W news, trading 4p lower at £27.76.

'Rathbone shares are currently very close to the 2800p trigger level at which we indicated we would look to take a more negative investment stance relative to our 2540p fair value,' McGinnis said.

'We thought it was smart for management to potentially use equity as acquisition currency for the S&W deal but continue to view the current valuation as stretched, even for a top quality discretionary fund manager such as Rathbones, where organic growth has been a struggle in recent years.' 

Peel Hunt, which also has a hold rating on Rathbones at £26.30 price target, was among the biggest supporters of the potential merger, saying it could be 'transformative' for the business. 

'Our initial thoughts when the deal was first announced was that this had the potential to be a transformative acquisition for Rathbones, significantly larger than anything completed before,' Peel Hunt analyst Stuart Duncan said.

'[However] we believe this to be the right decision if the financials of the transaction did not stake up alongside the strategic rationale.' 

Despite the failure to land the deal, Duncan remains confident about Rathbones' prospects. 

'We remain of the view that Rathbones is well positioned in a sector that still offers long-term structural growth,' he said. 

'Management has a number of strategic initiatives underway (eg private office, intermediary distribution), that should yield longer-term benefits in the coming years.'  

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