Penson Worldwide has entered into a deal to buy the clearing contracts of Broadridge Financial Solutions' Ridge business for up to $70 million and then outsource some technology and processing services to the seller.
Under the deal, Penson will acquire the contracts of the Ridge clearing business for a $60-$70 million consideration in the form of a promissory note and stock.
The buyer says it also expects to raise additional regulatory capital of about $50 million, to support the business. If it fails to raise this before closing, the firm has the option of borrowing the money from Broadridge.
For the last fiscal year the Ridge business had around $75 million in net revenues, more than 100 correspondents, and $1 billion in customer balances.
Penson says the acquisition makes it the nation's number two securities clearing firm, increasing net revenues and customer interest earning balances by 20-25% and 15-18%, respectively.
The two firms have also inked a 10-year contract for the outsourcing of back office technology services and certain securities processing functions to Broadridge.
Penson says this should save it more than 20% on the technology and services outsourced from existing securities clearing operations in the US, Canada and the UK. Penson's existing operations will begin converting to Broadridge in the third quarter of 2010, and be completed by the end of 2011.
Broadridge expects the outsourcing services contract to generate between $65 million and $75 million in annual revenue when the business is fully converted onto its securities processing platform.
The pair have also agreed a joint selling deal that will see Broadridge refer correspondents seeking securities clearing services to Penson. In turn, Penson will refer to Broadridge prospects interested outsourcing services.
Says Penson: "We see this as a 'game changer' for Penson. We will add significantly to our correspondent and revenue base, and improve our scale and operating leverage, leading to higher overall margins. This is an important step towards our vision of building the pre-eminent independent clearing and execution services firm."
Richard Daly, CEO, Broadridge, adds: "The Penson transaction creates considerable momentum for our securities processing strategy. It will enable us to have use of significant free cash that had previously been restricted, will eliminate any balance sheet risk associated with the clearing business, and provides us with a clear strategy for our securities processing business which now includes outsourcing."
Separately, both companies have reported quarterly results. Penson posted a fall in third quarter net revenue to $72.2 million with net income sliding from $7.5 million to $3.9 million.
Broadridge first quarter net revenue was $457.9 million, down on $472.4 million for the same period the previous year. Net income was also down, from $35.6 million in Q1 2009 to $26.4 million.