Dick Bove: Jefferies Has Become an "Acquisition Target"

Fox Business Network's (FBN) Charlie Gasparino reports Jefferies & CO CEO Richard Handler is weighing whether the firm can remain independent and if a sale to a larger player is inevitable. Rochdale Securities analyst Dick Bove told Gasparino that Jefferies has become an “acquisition target” to capital rich Canadian Banks like Royal Bank of Canada and TD Bank Group, while another investment source with knowledge of the firm's activities says Handler may also merge with an asset management firm. Excerpts from the report are below, courtesy of Fox Business Group. Charlie Gasparino's full report can be found here. On Jefferies CEO weighing a sale of the firm:“As he battles rumors that the brokerage company he runs is the next firm to fail, Jefferies & Co chief executive Richard Handler is weighing whether the firm can remain independent, investment banking sources tell the FOX Business Network. Selling out to a larger player would be a bitter pill for Handler to swallow since he took pride in Jefferies' independence -- and until recently, success at remaining independent -- but according to people who know him, he is weighing whether a sale to a larger player is inevitable.” On Jefferies becoming an “acquisition target”:“Rochdale Securities analyst Dick Bove told FOX Business that Jefferies is an "acquisition target" and the most likely acquirers are capital rich Canadian banks, which include Royal Bank of Canada and TD Bank Group. ‘I think that Canadian banks want to expand their presence in U.S. markets and that Jefferies is an acquisition target,' Bove said. Bove added that Jefferies has also told him ‘it wants to remain independent.'” On the possibility of Jefferies merging with an asset management firm:“Another investment source with knowledge of the firm's activities says Handler may also merge with an asset management firm. A spokesman for Jefferies had no comment on the matter, though he pointed out that in its recent quarter, Jefferies generated most of its revenues through investment banking. But trading revenues have slowed recently with some firms even posting trading losses. And trading revenues are cyclical and often provide fatter profits than investment banking fees, which have shrunk in recent years.” On investor fears in the business model of mid-sized brokerage firms:“The bigger problem for the firm is that investors sentiment has soured on the business model of a mid-sized brokerage firm that makes money taking risks in various markets, even if that risk taking is hedged as Jefferies claims is the case. Mid-sized firms, unlike giant banks, don't have access to large amounts of capital to cover bad bets and are forced to borrow in more risky short-term lending markets. As a result, such firms have to reduce risk but also accept lower profits and share prices if they want to remain independent given the current market environment.” On the Jefferies rebuttal letter stabilizing shares:“After falling dramatically, shares of Jefferies have stabilized at a little above $10, particularly after the firm published its rebuttal letter on Monday. But people who know Handler say the letter is a delaying tactic to buy time and figure out what to do next. ‘Those guys are smart they know there won't be a Jefferies in its current form two years from now,' said another investment banking source who has knowledge of the company's activities.”