Mumbai: Edelweiss Capital Ltd, the third largest listed brokerage by market value, is set to acquire Anagram Stock Broking Ltd, an unlisted stock broking firm with 169 branches, for nearly Rs150 crore, two people familiar with the development said, asking not to be identified.
The deal is likely to be signed before the end of this month, one of them added.
Retail focus: Edelweiss chairman and CEO Rashesh Shah. Abhijit Bhatlekar/Mint
Rasesh Shah, chairman and chief executive officer of Edelweiss, declined comment. Sanjay Lalbhai, chairman of the Lalbhai group which owns Anagram Stock Broking, was in the US and could not be reached for comment.
Jayesh Shah, chief financial officer of the group flagship company Arvind Mills Ltd, declined comment.
Edelweiss runs businesses of institutional equities, equity financing and investment banking and has long wanted to build a retail broking network.
In November, DNA Money reported that Edelweiss Capital was conducting a due-diligence of the books of Anagram Capital, ahead of a possible acquisition.
The deal, if it goes through, will give Edelweiss an instant entry into the retail broking space. Anagram has about 3000,00 clients mostly in Gujarat and Maharashtra.
Retail stock broking branches are critical for an investment bank that gets mandates to manage initial share sales, said the managing director of a stock-broking firm that had envinced interest in buying Anagram last year. He asked not to be identified because he does not want to be seen commenting on a deal by a rival.
“We had looked at it last year, but the valuation was beyond our estimate,” he added.
“It’s a good fit for Edelweiss,” said a former managing director of Anagram Stock Broking, who too spoke on condition of anonymity.
Analysts say buying a readymade platform is better than going for a greenfield network.
“If such a network comes at an appropriate price, then definitely it is better than building it on your own, given the strategic opportunities that you may have to let go when you are building it from scratch,” said Apurva Shah, vice-president and head of research, institutional equities, Prabhudas Lilladher Pvt. Ltd, a Mumbai-based brokerage.
Shah added that the price of Rs150 crore seems reasonable and that the retail business is an important part of the market which no serious player can afford to ignore. “Retail forms the majority of the market revenues, between 60% and 70%. But different players operate with different models. While Angel has 100% retail (clients), Edelweiss does not have any retail clients.”
Brokers had in the past tried to use the franchisee route to scale up business across the country. For instance, Reliance Capital Ltd rapidly expanded its retail brokerage through a franchisee-based model under the Reliance Money brand in 2007-08. It had to substantially scale down business, following the financial crisis in 2008.
In a franchise model, the franchiser offers the brand name and clearing services, while the franchisee owns the offices, and manages the staff and customers.
Consolidation among retail broking firms is inevitable, said V.R. Srinivasan, chief executive of Bric Securities Ltd which sold its institutional brokerage business to the India arm of the erstwhile Lehman Brothers Holdings Inc. in 2007.
The rise in investments required for technology infrastructure, clients’ requirement of multiple products, and the new rule of capping the commission on mutual funds sale will reduce the income of smaller regional players, Srinivasan added. Bric Securities sold its institutional business for Rs190 crore.
In 2008, Birla Global Finance Co. Ltd had picked up 56% stake in Apollo Sindhoori Securities Ltd, valuing the company at around Rs350 crore.
According to a Prabhudas Lilladher report released in November, equity market volumes have been rising month-on-month throughout 2009 and brokerages are expected to do well as their fee income rises with an increase in volume.
“There has been a general upward trend in the overall broking volumes. Agency revenues of the brokerages under our coverage increased by 23.0% y-o-y (year on year)... The growth has been mainly led by the broking and investment banking segments. Broking, the largest revenue contributor for all the companies, grew by about 6-8%, while investment banking on a smaller base grew in double digits,” the report added.
Edelweiss recently signed a joint venture with Japan-based Tokio Marine Holdings to float a life insurance firm. It also started an asset management firm in 2008. Distribution holds the key to success in both businesses and Anagram Broking’s retail reach will come in handy there.