RCS Capital Blasted for Poor Disclosure; May Need to Split Itself Up

NEW YORK (The Street) -- Troubled broker dealer RCS Capital Corp. (RCAP) may need to consider splitting itself up, according to a Citigroup analyst who has been both an outspoken critic of the company and champion of the stock.

New York-based RCS has seen its shares fall 78% over the past year amid accounting inquiries by the SEC and other regulators into a formerly affiliated company, American Realty Capital Properties Inc. (ARCP) The inquiries and a related lawsuit precipitated the resignation of Nicholas Schorsch from the chairmanship of both companies in December. RCS does not appear to be a focus of those investigations.

Citigroup analyst Bill Katz had called for Schorsch's resignation in a December 18 note. RCS announced Schorsch's resignation Dec. 30. In the lawsuit, former American Realty chief accounting officer Lisa McAlister accuses Schorsch of telling her and former CFO Brian Block to cover up accounting errors.

As RCS shares sold off amid the scandal, Katz turned bullish, adding them to Citigroup's "focus list" of most highly-recommended stocks throughout its coverage universe. The shares were at $10.90 when he upgraded them to "buy" with a $19 target price Dec. 16. (He later trimmed the target to $18 April 15.) On Friday afternoon they closed at $7.48. While coverage on RCS is quite limited, two of the three remaining analysts who follow the stock also recommend it.

Following earnings that missed estimates Thursday, Katz suggested on an analyst conference call with management that it might be "time to take bold action rather than just tactical cost savings to try and unlock value in the company."

Analysts appear to agree that the real value in RCS is in its retail brokerage division, though there are concerns new proposed rules from the Department of Labor are weighing on the stock. The rules are aimed at potential conflicts in the business of providing retirement investment advice. Because it distributes investment products through its wholesale and investment banking businesses and advises retail investors in a separate division, there would appear to be potential for conflicts of interest if RCS is deemed to be steering investors into proprietary products that may not be in their best interest.

Katz called it "notable that the wholesale business is turning around," but went on to suggest that, in light of "where the stock is trading," the different business lines might be "a distraction to the underlying value of the company." He claimed "no offense intended by the question of course."

CEO Mike Weill replied, "we feel very strongly about realizing maximum shareholder value and if that means a strategic alternatives, I know that the board and the management team is willing to look at this and address it as appropriate."

Katz did not respond to an email message and an RCS spokesman declined comment.

It is not clear breaking up RCS would be well-received by all analysts, however. Barclays analyst Kenneth Kill asked rhetorically in a Dec. 14 report whether splitting up RCS might make sense, but concluded that "sum [is] likely greater than the parts." The report, however, preceded the April 15 release of the Department of Labor proposal.

In a note published Monday, Katz reiterated his $18 price target on RCS and argued concern the company would violate its debt covenants is another factor depressing the stock. However, he contended those concerns are overblown.

Still, Katz criticized RCS management, arguing "communication and disclosure have been poor," around the debt covenant issue.

Shares of RCS were up 5.61% to $7.90 in late morning trading Monday.


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