Ever since news of the bumper fee emerged, rival bankers have been highlighting it, questioning how it affected the bank’s decision-making on the deal. Some (mostly non bankers) have queried whether the investment banking market is sufficiently competitive.
The context of the row is important. As I wrote in this column a few weeks ago the likes of Rothschild, Lazard and STJ Advisors are winning an increasing number of mandates on corporate finance deals which is profoundly irritating for many of the bulge bracket bankers who think they can handle the work themselves and do not like having to work alongside and often answer to independent financial advisers.
These advisers work for the companies wishing to list their shares and offer pure corporate finance advice without having distribution capacity for selling stock or lending facilities to finance debt-fuelled deals. They often help a company choose the banks that will supervise the distribution part of the deal, which irks the banks (who like to be the ones calling the shots) in the first place. They then tend to assist with allocation strategy and pricing strategy, something else acutely annoying for the banks who see it as being second guessed.
In the past, as City A.M. has reported, STJ Advisors based its desirability on a pitch that focused on how a company wanting to access the capital markets couldn’t trust its bankers who were hopelessly conflicted by their often cosy relationship with the institutions and a desire to give them a good deal. Not surprisingly, many of the banks aren’t their greatest fans.
Which leads on to the Rothschild fee. £12m is a lot to pay to one group of advisers in a deal that only raised £60m in new equity. Rothschild, however, is relatively unusual among City investment banks in that it has a substantial office in Manchester. Its bankers, led by retail specialist Majid Ishaq, spent around 18 months advising Bolton-based AO World to get the company to a position where it was ready for the public markets.
Rothschild agreed a fee with AO whereby it received one per cent of the eventual market capitalisation of the group once it was floated. Advisers say that even as recently as last autumn estimates put a value on the group of around £500m, which would have meant a more modest fee for Rothschild of £5m.
In the end, the company’s chief executive John Roberts was, as he told me yesterday, delighted to pay the full £12m because he believed Rothschild had been there when he needed advisers most. The other banks came on board during the last, admittedly hectic, three months. As much as the investment banking giants may dislike it, independent financial advisers are not going away. The AO World example is likely to increase its attractiveness to potential clients rather than diminish it, despite the size of the fee.