New York rollup buys at private prices then sells at public valuations, but now the CEO is buying stocks at public prices in some ‘privately negotiated transactions’ in hopes of a rebound
Desperate times call for different measures, and Rudy Adolf is betting $200 million that the cheapest RIAs on the planet right now are the ones his company already owns.
Amid soaring interest rates and falling stock prices, Focus Financial’s CEO convinced his board, which he chairs, to approve a $200 million buyout plan for the Company’s Class A common shares.
“The authorization will give us additional flexibility in our capital allocation strategy to invest in the highest return opportunities,” he said.
In other words, the best buy-low, sell-high arbitrage in the options universe exists internally,
Focused Stocks (FOCS) languish around $35 or lower from their July 23, 2018 IPO closing price of $38. The shares were trading at $61 to start 2022, posting a 52-week range between $33.20 and $69.13. The shares closed today up 1.4%, or 48 cents at $34.66.
Canadian company CI Financial, the other big RIA rollup, saw its stock (CIX.TO) caught in a similar downdraft on Wall Street. It hit a 52-week low at $10.66 intraday, before rising slightly to close the day at $10.99, down from $21.33 on Jan. 3 and a 52-week high at $24.52.
New York and Toronto companies have market capitalizations that are just over $2 billion.
CI Financial is planning a second IPO of its US-based RIA business in a bid to secure a more robust valuation. But the two companies could pull each other down. See: CI Financial’s IPO could make RIA M&A strength nearly unstoppable if it ‘jumps’, but industry insiders see Focus Financial’s stalled stock price as ‘huge headwind’
Adolf’s plan to support stocks is attractive, but it’s also a gamble, says Matt Crow, president of Mercer Capital in Memphis, Tenn.
“Focus has been saying for a while that their stocks are undervalued, and now they’re putting their money where they say,” he says.
Crow adds that Focus needs to be aware of what he’s doing with his dry powder.
“It’s a balancing act, though, because, one, they’re burning through cash that they could use for acquisitions, and two, they have to watch debt levels in a tough operating environment.”
Adolf addressed those concerns, at least in part, in a statement.
“We reiterate our commitment to investing in leading wealth management companies in the United States and strategically important international markets as we seek to grow our global partnership of 85 companies, while maintaining our net leverage ratio in a range of 3.5x to 4.5x,” he said. See: Focus Financial drops record as debt swells above critical ‘4X’ level, then shares tumble to new after-hours low
“We also reaffirm our targets for revenue and Adjusted EBITDA growth of over 20% for 2022 and our progress towards our 2025 targets; we expect that we will continue to benefit from the substantial growth and consolidation Of the industry.”
The problem with Adolf’s view is that he assumes headwinds and market pullbacks won’t persist, Crow warns. See: See: Focus Financial CEO puts a damper on the M&A market, waiting for a return to ‘normal’ – and buyers of Focus shares are raising the price as the debt ratio improves
“In a prolonged bear market, revenues will fall. If that happens in concert with rising debt servicing costs – with higher rates – they might wish they had that money.”
Focus gets a current Wall Street valuation of around $2.3 billion for 85 companies – with an average value of $2.7 million – generating adjusted cash flow of $135 million.
Wall Street analysts asked Adolf if he was paying too high valuations. His answer was categorical.
“We certainly avoided so many, I think I called them ‘drunk sailor deals’, that we saw in the last year.
“And yes, what we’re seeing is that for some of these heavily overvalued trades, buyers are now hurting.
“And, yes, quite frankly, we see – when I look at our pipeline, we see stable multiples, maybe even slightly improving, yes, in how we deploy our capital.
“So we have a very strong pipeline. I can say with confidence that 2022 will be one of our most successful M&A years, again, yeah, probably not quite on the level of last year. , but we will have – one of a very, very successful year.
“And, yes, the multiples are stable, if not improving. And yes, some of them, yes, very over-leveraged, yes, P/E type models and foreign buyers and others, according to this that we can tell, are suffering from, yeah, some of the deals they made last year.”
Based on its market capitalization of $2.3 billion and adjusted EBITDA of $135 million, Focus Financial currently has a P/E multiple of approximately 17. The average P/E ratio for the services sector financials is around 7.6, according to financial benchmarks.