FT on Redburn Rothschild deal

FINANCIAL TIMES, Lex, 17 July 2019

Independent equity research is one of those businesses everyone hopes will survive, providing someone else pays for it — like Woolworths, in its day. Ask Redburn Europe. Hard times have pushed the research-driven broker into the arms of Rothschild & Co. This should bolster the European redoubt of the independent investment bank, whose real challenge remains the US.

In January 2018, Mifid II forced brokers to unbundle charges for trading and research. In theory this should have helped independent research. Instead, it triggered a price war. The largest portfolio managers have cut their research budgets by about a tenth, says the CFA Institute.

Privately held Redburn was already losing money. Mifid II will have put further pressure on the firm’s owner managers. Rothschild is buying the business for an undisclosed sum. This is unlikely to be vast. Claims that Redburn will maintain its independence are questionable.

In Rothschild’s case, independence is indisputable. The Anglo-French investment bank is family-controlled and is a fixture of European corporate finance. It owned a stake in a broker before, Smith New Court, sold to Merrill Lynch in 1995. More recently, it entered corporate broking, which involves representing a UK company to investors. Redburn analysis should give Rothschild an edge here.

That will support Rothschild’s mid-table position in European M&A rankings. European research will do little for Rothschild in the US, where it lags behind Lazard, its closest rival.

Regulation creates a barrier to entry as well as challenges, the bank thinks. There is talk of research bosses resisting discounting. Some hope. Independents are wedged between bolshie fund managers and big brokers who treat research as a loss leader. Redburn may find its work has the same utility at Rothschild, which advised on deals worth $17bn in the three months to March.

AllianceBernstein bought Autonomous. Rothschild is buying Redburn. The value of research, is seems, is as part of a wider offer. Pick ’n’ mix confectionery still worked for Woolworths, after all else had failed.