Morgan Keegan a 'Home Run' for Raymond James: FBR (Update 2)

Updated with market close information.

NEW YORK ( TheStreet) -- Following the announcement late Wednesday of an agreement by Ramond James Financial ( RJF) to purchase Morgan Keegan from Regions Financial ( RJF), FBR analyst Steve Stelmach on Thursday called the deal an "inside-the-park home run" for Raymond James.

Raymond James -- headquartered in St. Petersburg, Fla. -- announced late Wednesday that it had agreed to purchase Morgan Keegan from Regions for $930 million, saying that the combination of the two brokerage firms would "create one of the country's largest full-service wealth management and investment banking firms not headquartered on Wall Street."

Shares of Raymond James pulled back nearly 4% on Thursday, closing at $32.96.

Regions had been peddling its brokerage subsidiary since June, and was originally aiming to sell the unit for about $1 billion. Regions announced on Wednesday that prior to the completion of the sale, Morgan Keegan would pay Regions a dividend of $250 million. Please See TheStreet's 10 Regional Banks: Fourth-Quarter Earnings Preview for more details on Regions Financial's earnings pre-announcement, which includes a goodwill impairment charge for Morgan Keegan.

The Morgan Keegan acquisition will include over 1,000 financial advisors, increasing Raymond James' count to over 6,000.

Following the merger, Morgan Keegan CEO John Carson will stay aboard as president of Raymond James, "and will oversee Fixed Income and Public Finance."

Raymond James CEO Paul C. Reilly said that "while our preference is generally organic growth, we have used strategic mergers to grow throughout our history when the timing and pricing are right and, most importantly, when there is a strong cultural fit and clear path for integration."

Raymond James plans to raise $300 million in common equity to partially fund the transaction.

Stelmach said that Raymond James remained a "top pick" for FBR, with a 12-month price target of $45.

The analyst added that the brokerage industry's "lull in industrywide retail activity has as much to do with the transitory state of the capital markets and interest rates in the wake of the financial crisis as it does with U.S. demographics," and that "moving forward, a capital-light business, such as retail brokerage, is only more attractive in the context of Dodd-Frank legislation and Basel III capital requirements that punish the balance sheet-intensive wirehouses and money-center banks." Within the above context, Stelmach said the Morgan Keegan acquisition was "extremely attractive, done at a very reasonable price from what was arguably a forced seller."

Raymond James is scheduled to announce its fourth-quarter financial results on Jan. 25 after the market closes, with analysts polled by Thomson Reuters expecting the company to post EPS of 54 cents.

Stelmach's fourth-quarter estimate matches the consensus, but for 2012, the analyst estimates EPS of $2.65, which is ahead of the consensus estimate of $2.49.

While FBR was waiting for "further clarity on accretion" before revising its earnings estimates for Raymond James, Stelmach said the Morgan Keegan deal was "nicely accretive," at 3% for 2012, "excluding deal-related expenses." The analyst added that "using 2013 consensus, we get to RJF's modest 2%-3% accretion only by assuming zero cost savings. But, on an estimated $930 million expense base for Morgan Keegan, 5% to 10% in cost savings does not seem unreasonable."

Stelmach said that the "the operating leverage at Raymond James is underappreciated, and we expect RJF to outperform, absent any multiple expansion due to improved earnings, as the operating environment becomes more favorable, particularly in financial advisor production and investment banking activity.

Raymond James' shares traded for 14 times the consensus 2012 EPS estimate, as of Wednesday's close at $34.18.

Interested in more on Raymond James Financial? See TheStreet Ratings' report card for this stock.

Shares of Stifel Financial ( SF) of St. Louis were similarly valued at 14 times forward earnings, based on Wednesday's closing price of $32.93.

Stifel is set to announce its fourth-quarter results on Feb. 13. Analysts expect the company to report fourth-quarter earnings of 43 cents a share. The consensus EPS estimate for 2012 is $2.39.

Interested in more on Stifel Financial? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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