Tavistock Investments Plc Acquires Standard Financial Group Limited
Tavistock Investments Plc ("Tavistock" or "Company"), the integrated financial services group, is pleased to announce that it has entered into a conditional contract for the acquisition of Standard Financial Group Limited ("Standard"), the holding company of an independent financial advisory business which operates predominantly through its regulated subsidiary, Financial Limited ("Financial")(the "Acquisition").
The Company has conditionally raised a minimum of £2.7 million to provide additional regulatory and working capital for the Acquisition, through a placing ("the Placing") of 53,200,000 new ordinary shares of 1p each in the Company ("Ordinary Shares") and a subscription ("the Subscription") for 81,800,000 new Ordinary Shares together with an Open Offer ("the Open Offer") of up to a further 30,455,624 new Ordinary Shares, all at an issue price of 2p per share. The Open Offer is intended to afford the Company's existing Shareholders an opportunity to invest further at the same discounted price at which the Placing and Subscription have been agreed.
In view of the size of the Acquisition relative to the Company, it constitutes a reverse takeover under the AIM Rules for Companies and therefore requires the approval of shareholders which is being sought at a general meeting to be held on 12 February 2015 ("General Meeting"). Application will be made for the enlarged share capital of the Company to be admitted to trading on AIM, subject to the passing of the resolutions proposed at the General Meeting . Admission of the enlarged share capital of the Company is expected to take place on 13 February 2015 ("Admission").
Strategy and Progress
The principal objective of the Company is to create a large and profitable business in the financial services sector and for Shareholders to achieve significant capital appreciation from the profitable growth of a business that combines both financial advisory and investment management services.
Since their acquisition in June 2014, the Company's existing operations, Tavistock Partners, an independent financial advisory business, and Tavistock Wealth, an investment management business, have reported good progress.
The Board's focus has therefore turned to increasing the scale of the group's operations, specifically increasing the size and geographic spread of the advisory business and thereby offer the group's investment management services to a significantly larger audience. The acquisition of Financial is designed to achieve both of these aims for a comparatively modest cost.
The main trading subsidiary within Standard is Financial, an independent network of financial advisers that is regulated by the FCA under authorisation number 188153. Financial was founded in 2001 and, from its base near Cheltenham, provides Appointed Representatives (financial advisory firms) with a range of compliance, training and back-office services, together with the regulatory approval required for them to operate.
As of 31 December 2014, Financial had 256 Appointed Representatives with a total of 301 Registered Individuals (individual advisers), making it the 7th largest network in the UK. Its network generates gross annual revenues of some £28m and has over 60,000 customers.
Financial grew rapidly under the direction of the company's founder and turnover from its member firms reached approximately £14m by 2009. However, it had become clear that the systems and controls operated by Financial had failed to keep pace with its rapid growth and the resulting weaknesses led to the company being placed under investigation by the then regulator, the FSA.
Subsequently, Financial was also required to take part in an industry wide review of advice given in relation to pension switching in 2008. Due to the regulator's concerns with the initial findings, this led to Smith & Williamson being commissioned to produce a report on Financial's methodology and redress calculations that, in 2010, defined the remedial actions to be carried out. In September 2011, Financial was also required to take part in a further industry wide review of advice given in relation to investment in Unauthorised Collective Investment Schemes ("UCIS"). This involved reviewing all UCIS business conducted by Financial's members to ensure clients had not been unfairly disadvantaged.
A routine inspection by the FSA in May 2012 resulted in the issuance of a Risk Mitigation Plan ("RMP"), part of which was to extend the review of pension switching advice to cover 2008-2012. The RMP also led to the more recent investigation and enforcement action by the FCA in relation to Adviser Controls and Risk Management. Under the FCA's section 166 authority, The Consulting Consortium Limited ("TCC") was appointed in March 2013 and their report, produced in September 2013, identified significant process and control weaknesses in Financial's supervisory environment. The regulator determined that this may have placed investors at risk of receiving poor or unsuitable advice. In addition, work on the previous past business reviews ordered by the regulator was not felt to have progressed at an acceptable rate.
A new and experienced board and management team was appointed to Standard in 2012, following the FSA's inspection, and in January 2013 Standard's owner and founder stepped down from any involvement in the management of Financial. The new team has worked diligently and in close cooperation with the FCA to remedy the control environment weaknesses that had been identified. This work included addressing over 170 required actions identified by TCC in their September 2013 report. Having produced a further report in May 2014, TCC determined in October 2014, that all required actions had been successfully addressed. This has resulted in controls & processes that are both strong and effective.
Financial has also closed off the business reviews ordered by the FCA's 2013 enforcement action with any disadvantaged clients having been compensated. In addition, a renewed focus has been given to the completion of the previously ordered pension switching and UCIS past business reviews to ensure that any client who suffered detriment receives appropriate compensation. This has seen Phase 1 of the pension switching review closed with 44 clients being paid redress at an average of £1,500 per case. It is hoped that all of the remaining client cases to be reviewed will be completed before the end of 2015. All past business reviews have been disclosed to, and accepted by, Financial's professional indemnity ("PI") insurers and this limits the exposure of the business. Under its contracts, Financial also recovers the amount of any insurance excess payments from the Appointed Representatives and Registered Individuals involved and its audited success rate in recovering such payments is 90 per cent.
On 23 July 2014, the FCA published a final notice in respect of Financial, imposing a public censure on the company, fining it £12.5 million that was waived due to financial hardship, and restricting it from appointing any new advisers for a period of 180 days. The recruitment moratorium was reduced to 126 days (that ended on 26 November 2014) in formal recognition by the FCA of the efforts & co-operation of Financial's new management team in dealing with the enforcement issues identified.
The expiry of the moratorium closed off the enforcement action on 26th November 2014.
Having had its compliance processes scrutinised by both independent professional advisers and the regulator over an extended period, the Directors believe that Financial now has robust, effective and compliant systems in place across its business and it is the ambition of its management team is to set industry leading standards for the supervision of advisers.
The directors of Tavistock are confident that adequate provision has been made in Financial's audited accounts for those matters that have yet to be fully resolved (the remaining past business reviews for pension switches and UCIS) and acceptance of all cases by the company's PI insurers further secures the financial position of the business.
However, the commercial legacy of past difficulties has left Financial short of working capital for both regulatory and operational requirements. This situation has enabled the Company to negotiate favourable terms for the acquisition which are described below.
Terms of the Acquisition
Tavistock has agreed to acquire the entire issued share capital of Standard, subject to certain conditions including change in control approval from the FCA and Admission. Simultaneous with the acquisition, Standard will dispose of its subsidiary IFA Compliance Limited ("IFAC") to the vendor, for the sum of £52,000 payable in cash upon completion. IFAC is an unregulated limited company which provides certain compliance services to firms that are directly authorised by the FCA and is thus outside the scope of the current Tavistock Group.
The initial consideration for the acquisition will be the payment of £500,000 in cash. The vendor is obliged to utilise £52,000 of this consideration for the acquisition of IFAC referred to above and the balance of £448,000 to repay outstanding inter-company loans owed by IFAC. These arrangements ensure that the full £500,000 described above is applied for the benefit of Standard and its subsidiaries.
On completion, Tavistock will provide Standard with £500,000 as additional working capital and will undertake to provide up to an additional £500,000 if required, thereby increasing the aggregate funding to be provided by Tavistock as a consequence of the Acquisition, to of £1.5m.
As one of Tavistock's principal objectives from the proposed transaction is to increase the scale and geographic reach of its advisory business, it has offered as a part of the consideration to issue to the vendor new shares in the capital of the Company based on the number of advisers who remain with the business post completion. The Company will pay a deferred consideration to the vendor of an amount equal to £2,000 for each adviser within Financial who remains within the Group from the date of completion of the Acquisition until 31 March 2016. This deferred consideration will be satisfied by the issue of new Ordinary Shares at the five day average closing mid-market price of the Ordinary Shares prior to the date of issue, which will be on or around 30 April 2016. These deferred consideration shares will be subject to a lock-in, save in certain circumstances, until 20 August 2016. Based upon Financial having 301 advisers at 31 December 2014, the maximum potential deferred consideration for the transaction would be £602,000.
Benefits of the Acquisition
Whilst it is not possible to definitively state the level of assets that are currently advised upon by members of the Financial network, the Directors believe the amount to be in excess of £2.6 billion.
Following completion, Financial's advisers will be able to offer the services of Tavistock Wealth to those of their clients for whom it is appropriate. Less than six months since completion of the Company's initial acquisitions, over 28 per cent. of Tavistock Partners' funds under advice are now in its risk progressive investment portfolios. It is therefore hoped that a large number of Financial's current advisers will similarly introduce Tavistock Wealth to a significant number of their clients. As only a limited number of additional staff would be required by Tavistock Wealth in order to manage a much higher level of clients' assets in its portfolios, it is believed that any meaningful penetration of Financial's present client base will result in a substantial increase in the Group's profitability.
The Directors believe that the principal potential benefits of the Acquisition can be summarised as follows:
- a substantial and immediate increase in adviser numbers (from 23 to 324), customer numbers (to over 65,000) gross turnover (to over £30m) and the geographic coverage of our network;
- the increase in funds under advice by the group to an estimated £3 billion;
- the immediate opportunity for Financial's advisers to introduce clients to Tavistock Wealth where appropriate;
- the potential for the funds under advice at Financial to be invested in the Tavistock centralised investment proposition ("CIP") managed by Tavistock Wealth. Currently over 28 per cent. of funds under advice within Tavistock Partners is so invested and Tavistock Wealth currently makes an average net margin of approximately 0.4 per cent. on the gross value of funds so invested.;
- the immediate introduction of well qualified senior management in positions that the Company needs to fill;
- the recruitment of a loyal and experienced team of support staff and of a national team of field supervisors;
- the opportunity to integrate two businesses and establish a profitable national operation;
- the opportunity to establish Tavistock as a national financial services brand;
- to raise the profile of the Company and thereby enable it to attract high calibre advisory firms and to complete other significant corporate transactions; and
- the potential to achieve economies of scale and improve margins.
The Placing and Subscription
The Company has conditionally raised £2,700,000, in aggregate, before expenses, by way of a placing of 53,200,000 new Ordinary Shares ("Placing Shares") pursuant to the Placing and the subscription for 81,800,000 new Ordinary Shares ("Subscription Shares") pursuant to the Subscription at 2 pence per share. The Placing Shares and the Subscription Shares will represent between approximately 47.0 per cent. and 52.6 per cent. of the enlarged share capital of the Company upon Admission, depending upon the results of the Open Offer.
Brian Raven, Group Chief Executive, is participating as to £240,000 in the Subscription, Oliver Cooke, Chairman, is participating as to £25,000, Roderic Rennison, non-executive director as to £5,000 and Philip Young, non-executive director, as to £10,000. Three of the senior executives of Standard, Brian Galvin, Ian Henson and André Oszmann, are participating as to £225,000 in aggregate in the Subscription.
The Directors' participation in the Subscription constitutes a related party transaction under the AIM Rules. As all of the Directors are participating in the Subscription none are considered to be independent for the purposes of the AIM Rules. Accordingly, Northland Capital Partners Limited, as nominated adviser to the Company, has considered the participation of the Directors in the Subscription and is of the opinion that their participation is fair and reasonable insofar as Shareholders are concerned.
The proceeds of the Placing and the Subscription will be utilised to meet the costs of the proposed transaction and to provide ongoing regulatory and working capital for the Enlarged Group.
The Open Offer
In order to minimise the dilution to existing shareholders, the Directors are proposing the Company undertake an open offer. The proceeds of the Placing and Subscription provide the Company with sufficient working capital for the foreseeable future and any additional funds invested by shareholders through their participation in the Open Offer will be utilised for general working capital.