JAMAICA Money Market Brokers (JMMB) has made an offer to acquire up to 100 per cent of the issued share capital of Capital & Credit Financial Group (CCFG) at a price of J$4.55 per share subject to regulatory approval by the Bank of Jamaica.

The application will go in by the end of September with BOJ taking 60 days to review the application before coming to a decision. This means that JMMB will be looking to get the green light from the Bank of Jamaica sometime by the end of November. The legacy shareholders of Capital & Credit have agreed in principle to this deal and it now awaits its Board of Directors approval.

JMMB is offering a 70 per cent cash payment of J$2.95 billion and the remainder by way of an issue of new ordinary shares in JMMB to the shareholders of CCFG, subject to the necessary JMMB shareholder approvals being obtained.

Speaking with Caribbean Business Report from JMMB’s Haughton Avenue headquarters in Kingston yesterday, JMMB Group CEO, Keith Duncan said: “As part of our Group strategy over the last three or four years we have been looking to acquire entities both locally and across the region. In Capital & Credit we saw a business that has complimentary services and those that we don’t have at this point in time. It was a good opportunity to purchase the Capital & Credit Financial Group which has assets under management of $40 billion with 20,000 clients. It also has products that we are not able to offer under the JMMB umbrella. For example we do not offer unit trusts, banking services, debit and credit cards, and the Multi-Link network. Capital & Credit does, so it adds extra dimensions to our business while at the same time creating economies of scale and adding to our client base.”

The way Duncan sees it, by combining both entities it brings operating efficiencies and significant increases in shareholder value, not to mention the value proposition to clients. The deal will allow JMMB to package products and services to meet their needs while getting closer to becoming an indigenous provider of integrated financial services. If the deal were to go through, JMMB will be looking to rebrand, thus bringing Capital & Credit and its arms of business under the JMMB brand which has considerable recognition both locally and in the region.

If it were to have two securities brokerages, it is likely to sell off one of the seats. Wherever both entities are in the same business line, JMMB will look to combine both in order to get the revenue enhancements and operating efficiencies to therefore create more value and so address issues of overlap.

JMMB’s strategy of growth by acquisition as opposed to the slower process of doing so organically obviously works, as it now will have 180,000 clients and assets under management on balance sheet of $160 billion. When one talks about off balance sheet, that figure is closer to $180 billion when both finance houses are combined. Details of synergies and efficiencies will be worked out once regulatory approval is granted. JMMB’s focus has always been human capital and it is placing great emphasis in this regard as far as integrating and fusing both players. Here Duncan stressed that JMMB will be working in a collaborative way with CCFG in order to get the best of both teams as it moves forward.

“At the end of the day we will end up with the best of both worlds. We will have leadership in place which is competent and believes in the vision and strategic path. This is in effect an augmentation of the JMMB team.”

But what about the likes of Ryland Campbell, Andrew Cocking and Curtis Martin? Where do they fit into the scheme of things?

“Some of the leaders of Capital & Credit may well become directors of JMMB entities. This is likely as Capital & Credit shares become swopped into JMMB. We think the Capital & Credit leadership team have done a great job in creating value over the last twenty years. I think they see the benefit of this acquisition as it creates value for them, their shareholders and for us as JMMB shareholders, not to mention the wider market in Jamaica. What they have done makes absolute economic sense. We are going to take some of their best minds to help us chart the way forward. We now have to find out from them who is willing to serve and this will help in our decisions when putting together our various Boards of Directors.

“The legacy shareholders have agreed to do this deal and have signed off on this transaction. Where it needs to go to now is their Board of Directors once regulatory approval is granted. Now those legacy shareholders hold over 50 per cent of the issued ordinary share capital of Capital & Credit.

This potential transaction is one of the biggest on the local financial landscape in many years and what made it possible was JMMB’s undoubted liquidity strengths. Over the last couple of years it has been storing liquidity in order to make acquisitions as they come alone. It has a ton load of cash sitting down on Bank of Jamaica CDs and Duncan says its balance sheet is as clean as a whistle.

“You see a number of finance houses in Jamaica struggling with bad loan portfolios but one doesn’t see that at JMMB. We have cleaned up our small-loan portfolio and most of our funds are invested in government paper and CDs which helps to bolster our liquidity and make us better able to pursue acquisitions. This transaction will cost us $2.95 billion in cash so one can see the kind of resources you need at hand to make this kind of move. We can do this and still have a buffer in terms of being able to weather any volatility in the markets going forward,” said JMMB’s CEO.

Strong financial performance

JMMB’s net profit for the period ended June 30, 2011 increased by 437.5 per cent over the corresponding period last year. This was boosted by a 50.6 per cent increase in net income to $725.4 million and a 375.4 per cent rise in other operating revenues, namely gains on securities trading. JMMB’s efficiency ratio (administrative costs as a percentage of operating revenue) improved to 38.1 per cent from 69.4 per cent when compared to the corresponding period last year. Operating expenses increased by 22.1 per cent to $637.6 million compared to $522.2 million over the comparative period in 2010.

Speaking on the Group’s more recent financial performance, Duncan said: “Our core operating revenues (net interest income,fees and commissions and gains and sales of securities trading) have been growing and that means we are on track. We are always looking for one-off gains and we have in place a pipeline of transactions. We posted an after-tax profit of $950 million, our best quarter ever. We are expecting great results for Q2 although there will be a degree of slowdown in Jamaica due to the international turbulence we are currently seeing. If interest rates are kept low in the United States that would be a boon to our net interest income line as well as it being good for Jamaica in terms of keeping interest rates down. However, we expect the Jamaican economy will be challenged due to reduction in demand as a result of this volatility in the world markets. In may well impact the indicators here in Jamaica like bond prices.”

He further added that after the crisis of 2008, many people opted to save more in an effort to weather future storms and this behaviour may well replicate itself which should go some way in assisting JMMB to grow its client base.

NCB buys 29% stake but has no management control

NCB Capital Markets has purchased a 29 per cent stake in JMMB, making it the largest single shareholder in the institution. Though that may be the case, it does not have a management position and will not be shaping the direction or strategies of the Group. It simply has made an investment, nothing more.

Commenting on this latest move by NCB, Duncan said: “Well, what I have to say here is that NCB have been absolutely shrewd in making this investment and it is the right choice because they will be getting excellent value. NCB understands where JMMB is going and they know the impact we have had on the market. When they make an investment like this they know they are going to get rich dividends. They are now shareholders of JMMB and we pay them the greatest of respect.”

In effect, NCB acquired CL Financial’s stake in JMMB. Now defunct Clico had borrowed funds through Republic Bank, with Clico putting up JMMB shares as collateral. Republic Bank exercised its rights over that collateral and then sold the shares in order to create liquidity.

“NCB has no management stake in NCB and to do so would create an unnecessary conflict. It has indicated through its press release that it will have no management impact on JMMB or its strategic direction. This is solely a straight up investment for them,” declared Duncan.

So how does the shareholding structure of JMMB stand now? The Duncan family, ESOP and JMMB’s chairman Dr Noel Lyon hold close to 50 per cent.NCB has 29 per cent, Clico hold’s 11 per cent and the rest goes to small shareholders. Duncan says there is no cause for concern here as the bulk of the shares resides in the family’s hands.