BREAKINGVIEWS-Boutique bank deal champions long-term greed

By Antony Currie

MELBOURNE, March 2 (Reuters Breakingviews) - A few Tim Tams now or a boxful later? Barrenjoey Capital Partners, the fast-growing newcomer in Australian investment banking, is making clear its willingness for delayed gratification, known in financial circles as being long-term greedy. The concept, coined by erstwhile Goldman Sachs GS.N senior partner Gus Levy, features in the subtext of the boutique's deal unveiled on Monday at a A$1.6 billion ($1.1 billion) valuation.

It's a hefty price tag for an advisory shop that's not even six years old. Paying 15 times 2025 earnings is also rich for buyer Magellan Financial MFG.AX, which already owns 36% of closely held Barrenjoey and whose own publicly traded stock fetches just 9 times. Even so, by broader comparison, the struggling fund manager struck a bargain. U.S. peers Evercore EVR.N, Moelis MC.N and Lazard LAZ.N trade as high as 22 times, and none is hopping along at Barrenjoey's pace: net income, adjusted for its employee share plan, nearly doubled in the six months to the end of December.

Advising on M&A and stock issuance can be a fickle business, of course. Barrenjoey, which means "young kangaroo", has nevertheless become a formidable force in the capital markets Down Under. Founded, among others, by former UBS stalwarts Guy Fowler and Matthew Grounds with backing from Magellan and UK lender Barclays BARC.L, it has plucked some well-regarded rainmakers and landed plenty of client work.

In something of an advertisement for its financial nous, the investment bankers engineered themselves into power. Despite owning only about a third of the newly combined outfit, Barrenjoey Chair David Gonski and CEO Brian Benari will have the same roles at the enlarged group, while half the directors, excluding management, will come from the firm's board.

It's a fair reflection of relative performance. Active investor Magellan has cratered, losing top staff and big mandates. Since backing Barrenjoey, its assets under management withered to A$40 billion from A$100 billion, while net profit plummeted by about three-quarters. Its stock price has slumped 85%.

Barrenjoey's growth implies that its earnings will soon dwarf Magellan's, which should help boost the valuation before long. If Benari, Fowler and Grounds can manage all the money better, there's even more room to improve. Their equity stakes are also locked up for nine years, and company-wide it's more than five years on average. There are sufficient incentives, therefore, to forgo the quick buck.

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CONTEXT NEWS

Asset manager Magellan Financial said on March 2 that it had agreed to merge with Barrenjoey Capital Partners in a deal that values the nearly six-year-old Australian investment bank at A$1.6 billion ($1.1 billion).

Magellan also said it would increase its stake in Barrenjoey to about 46% from 36% by acquiring more than half the 18% holding owned by UK bank Barclays for A$149 million, using cash from the proceeds from a secondary equity offer.

Magellan will finance the rest of the transaction by issuing almost 93 million shares to Barrenjoey stockholders and some 14 million shares to Barclays.

After completion of the merger, Magellan shareholders will hold about 58% of the new company, with Barrenjoey employees owning almost 32%. New shareholders from the secondary offering and Barclays will have the rest.

Barrenjoey Chair David Gonski will lead the board of the combined group, while Barrenjoey boss Brian Benari will become group CEO.