Market Overview

Jefferies Expands in Europe as RBS Returns to Retail

American investment firm Jefferies Group (NYSE: JEF) will be buying Hoare Govett, a British stockbroker that was part of the Royal Bank of Scotland (NYSE: RBS) as it continues its push to expand in Britain.

Hoare Govett is a corporate broker with dozens of clients in Britain and continental Europe, including easyJet (LON: EZJ), camera retailer Jessops, print conglomorate John Menzies (LON: MNZS), and engine manufacturer Rolls Royce (LON: RR).

While British banks are in need of cash and facing declining investment opportunities due to falling revenues, the sovereign debt crisis brewing in the eurozone, and a sluggish economy teetering on recession, Jefferies has seen an investment opportunity in Europe and has acted accordingly. The company recently hired several bankers from UBS (NYSE: UBS) and expanded in equity markets, as well as a purchase of derivatives subsidiary Prudential Bache last summer from Prudential (NYSE: PRU).

The firm has been planning a takeover of Hoare Govett for a while, and shares of RBS were up nearly 4% in trading Wednesday as rumors coalesced over the deal.

Meanwhile, Jefferies has seen a steady growth in revenues thanks to expansion in Europe and elsewhere, with revenues in 2011 ending November up to $2.55 billion from $2.19 billion in 2010. However, the firm's profit margins fell to 8.94% from 9.77%, with income at $285 million for 2011.

Jefferies currently employes around 3,900 worldwide.

While RBS has not commented on the deal, it is well known that the bank has been looking to restructure in the hopes of maintaining profitability. Hoare Govett has not been a profitable venture for them, nor is it designed to be. The company offers discounted equities advice to clients in the hopes of attracting more profitable business from those clients at a later date. Such a business model fits Jefferies's aggressive expansion approach to the industry much more than the focus on cost containment at RBS.

Part of the move may be due to political pressure to alleviate the now majority government-owned bank to shy away from more risky operations in exchange for the government support that the bank is still dependent on. Currently, 83% of RBS is owned by the British government.

Britain's government, currently led by a coalition of majority Conservative and minority Liberal Democrat constituents, has been pushing RBS to focus its efforts on retail banking and away from more exotic investment activities. Such a move may turn out to be more profitable for the bank than some analysts may expect, if it can repeat the success of Wells Fargo (NYSE: WFC), which saw a 20% jump in profits thanks to a focus on mortgage banking, while Citigroup's (NYSE: C) inability to return to boring retail transactions has meant lacklustre earnings at the end of 2011, after previous losses and a 10:1 reverse split.

While the move away from investment banking may help RBS if it can make the transition smoothly, Jefferies is hoping to profit from the riskier investment banking sector in Europe. And now may be the riskiest time for investing in Europe, thanks to a dicey eurozone system and a fundamentally unstable global currency. However, Jefferies has been making the right moves so far, but it will need to stay on its toes to survive in Europe's dicey waters.

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