B. Riley Adds Wunderlich to Gain Small-Cap Market Edge

B. Riley Financial  (RILY) , the firm purchasing brokerage FBR, has agreed to pay $67 million for Wunderlich Securities to cement the dominant position CEO Bryant Riley is building in small-cap investment banking.

Wunderlich, a closely-held Memphis, Tenn.-based company with a network of more than 200 financial advisers, will receive $36 million in cash, 1.9 million shares of B. Riley common stock and warrants to buy an additional 820,000 shares, the companies said in a statement Thursday. After the deal is completed, which executives expect to happen before the end of June, the combined firm will have $11 billion in assets under administration.

Los Angeles-based B. Riley climbed 2.2% to $14 in New York trading after the announcement. The shares have gained 41% in the past year, outpacing a 15% increase on the broader S&P 500, as traders speculated that finance firms would benefit from Washington's plans to loosen regulations after real-estate mogul Donald Trump won the White House in November and Republicans kept control of both houses of Congress.

Wunderlich adds specialized brokerage and advisory services for so-called retail, or individual, investors, complementing the broader array of institutional products that B. Riley gains with the $160 million acquisition of FBR, CEO Bryant Riley said in a telephone interview.

"I've worked with that team for years, and so has FBR, so we know them really, really well," he said. 

Together the three companies will create an investment banking, research and brokerage firm that covers more than 700 companies, has one of the world's largest asset-valuation and transfer units and is the top bookrunner for initial public offerings of companies valued at $1.5 billion or less.

FBR's operations will be more integrated with those of B. Riley than Wunderlich's because of their differing product specialties, the CEO added. Wunderlich Securities CEO Gary Wunderlich will continue to lead the firm after the acquisition and will also take a seat on B. Riley's board, the companies said. 

FBR and B. Riley will be able to show Wunderlich's retail brokers "a really good product they'll want to invest in," Riley said in the interview, "but it's important that they have the ability to make those decisions on their own." 

B. Riley's previous deals, including the purchase of internet-services provider United Online in 2016, served as a guide for its most recent transactions, which take advantage of pent-up client demand after several brokerages closed during the market upheaval of early 2016. 

Riley remains optimistic about the prospects of a Republican-led government easing regulatory constraints even amid the distractions of multiple probes into the Trump administration, and sees investor interest beginning to swing back toward human stock-pickers from less expensive index and exchange-traded funds.

"After 20 years, I've seen a lot of cycles," he said. "I just do not believe that you can take one of these thousands of ETFs and that is the basis for investing in the stock market. Because of all the money that has flowed into that, there is an opportunity to find really interesting single-stock ideas that might not be part of that ETF club or might be out of favor."

So-called passive funds, which have expanded at the expense of active managers, are based on industry groups or market size, Riley said, rather than thorough research into a company's operations, distributions and prospects.

The latter choice, he said, "is a much better way to invest, and I just think that's going to come back. I think it's gone way too much to the passive side."

Wachtell, Lipton, Rosen & Katz provided legal counsel on the transaction for B. Riley Financial. Baker Donelson was legal counsel for Wunderlich, and Keefe, Bruyette & Woods was financial adviser.

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