A merged Advisor Group-Cetera would be roughly the same size as LPL when it went public. LPL shares moved sideways for several years after it went public but they have nearly doubled over the last 18 months, a fact clearly noticed by potential acquirers of Cetera.
Some Cetera reps have pleasant memories of the era when Marron and Brown owned the firm and some received stock option windfalls when it was sold to Nicholas Schorsch’s RCAP in early 2014 for $1.1 billion. In contrast, the Schorsch years were turbulent ones for Cetera reps, as his acquisition whirlwind ended up in bankruptcy in 2016.
Several investment bankers say that Lovell Minnick, a mid-sized firm, has been aggressively trying to team up with at least one or two other private equity players to mount a consortium deal to purchase Cetera. If successful, this would be a transaction that would likely substantially preserve the status quo for Cetera as a stand-alone company, and might therefore be preferable to the vast majority of Cetera’s advisors and institutions, as well as the Cetera management team, led by CEO Robert Moore.
Third-party recruiters see their own windfall if Cetera is sold. “Any deal that involves Cetera being merged with another large player, like LPL or Advisor Group, is going to trigger a large advisor exodus to other firms, which will have a negative impact on the ultimate valuation of the deal for Cetera’s current shareholders” said one third-party recruiter who has worked frequently over the years across various Cetera firms. “If you’re one of Cetera’s private shareholders right now, you’re probably going to look at the buyer who will trigger the least amount of advisor movement away from Cetera, even if other buyers like LPL or Lightyear are offering more money nominally.”
It’s also hard to underestimate how the collapse of the Department of Labor’s proposed fiduciary rule has brightened the outlook of private equity firms for the future of the brokerage business. That’s why some think a PE consortium bid that is friendly to Cetera management could be more likely to win the Cetera board’s approval.
Though LPL Financial had not dropped out of the bidding, sources close to certain investment banks involved in the auction process increasingly assign a “very low probability” to the nation’s largest independent brokerage acquiring Cetera, driven largely by LPL’s continued challenges with integrating advisors from the four National Planning Holdings (NPH) broker-dealers the company purchased from Jackson National last year. It’s noteworthy that LPL was already supporting 14,000 reps before acquiring another 3,000 from NPH.
While the transaction proved a major financial win, the challenges of integrating them are thought to be a major reason why LPL isn’t seen as the likely high bidder. Then again, LPL could be feigning lukewarm interest to keep the bidding within reason and then come in at the last minute and top the other potential acquirers.
“At this point, it seems like LPL is staying in the auction process for the optics, and to be as much in the know as possible about what’s next for Cetera. The NPH deal was a big financial win for LPL, but there’s not any serious appetite from LPL right now to buy Cetera, given all the issues they’re having with metabolizing the thousands of NPH advisors they’ve picked up,” said one senior investment banker who is familiar with both the Cetera auction process as well as LPL's Jackson transaction.
Had LPL known that Cetera might be available to acquire, it might have waited given Cetera's size.
Whatever happens, observers believe there is likely to be a change of control transaction by the time the auction process ends by no later than the close of summer. That’s because when Cetera emerged from bankruptcy in 2016, its debt was structured to start escalating a few years down the road. That moment is fast approaching and, while there is still the possibility it could refinance the debt on more favorable terms, investment bankers consider that unlikely.