City brokers agree £42m merger deal: Cenkos in tie-up with rival Finncap

Two of the city’s largest brokers will join forces to create the Square Mile’s largest investment bank focused on small-cap companies.

Finncap and Cenkos Securities have agreed on an all-stock merger to create a £42 million entity with a combined workforce of approximately 230.

It comes as brokerage firms scramble to find new business amid a downturn in the economy that is hitting deal-making across the financial industry.

Through the partnership, Cenkos investors will receive 3.2 shares of Finncap for every share they hold in the company, valuing the two companies equally at £21 million.

After the merger, both groups of investors will own about 50 percent of the new company, with Finncap and Cenkos bosses staying on as co-chief executives. Cenkos Chairman Lisa Gordon will become chairman of the combined company.

“The cultures of the two firms are very similar and our client lists and capabilities complement each other,” she said.

“This is good for our clients, our employees, our investors and the UK capital markets as a whole.”

The deal was already backed by Finncap investors who own about 52 percent of the company’s shares.

These include big money backers such as venture capitalist Jon Moulton, the largest shareholder, technology queen Vin Murria, and Sam Smith, the company’s founder and former boss who stepped down last year.

Meanwhile, notable Cenkos investors, including City grandfather Jim Durkin, who was a founding member and two-time CEO, have also backed the deal, bringing total backing to more than 32 percent.

“This merger is a real encounter,” says Cenkos boss Julian Morse. His Finncap counterpart, John Farrugia, said the merger was “the right thing to do” and would strengthen the company against competitors, some of whom he called “pretty damn weak.”

Shares in Finncap rose 5.4 percent or 0.63 pence to 12.25 pence following news of the merger.

Shareholder: Finncap founder and backer Sam Smith stepped down last year

Cenkos, however, fell 1.3 percent, or 0.5 pence, to 38.5 pence. The partnership may have come as a surprise to some in the Square Mile, as just four months ago merger talks between Finncap and Panmure Gordon came to nothing.

While the failure of the deal was blamed on the two brokers not agreeing on a price, a City source claimed they simply “didn’t get along.”

The failure of the Finncap merger was a blow to Panmure’s colorful boss Rich Ricci, an investment banker who once described himself as the “craziest son of a bitch in the world,” as well as the company’s main backer, ex-Barclays boss. Bob Diamant.

Meanwhile, others speculated the partnership could lead to more mergers in the industry. “It will kick off a wave of consolidation driven by a long period of no deal flow and a high cost base,” said Adam Pollock, director of boutique investment manager Oberon.

He added that all eyes would now be on the rejected Panmure and what it would decide to do next.

The merger between Cenkos and Finncap comes as City brokers and investment managers scramble to prop up their businesses, which have been flipped over the past year as the economic downturn put the brakes on deal making, fundraising and IPOs.

It has weighed heavily on the share prices of several companies, with Finncap’s share falling 57 percent over the past 12 months, while Cenkos is down 48 percent.

Rival small-cap brokers also suffered in the market, with Peel Hunt down 17 percent and Numis down 18 percent.

“It’s like the Gobi Desert and everyone is thirsty and fighting over the leftovers,” says AJ Bell investment director Russ Mold.

He added that the convergence of brokers and cost cutting seemed “ever inevitable” if demand did not pick up, particularly from smaller growth companies.

“At this point, that seems unlikely,” Mold said.