CBG Close Brothers Group Plc

  NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

FOR IMMEDIATE RELEASE

19 September 2024

Close Brothers agrees sale of Close Brothers Asset Management to Oaktree

Close Brothers Group plc ("the group" or "Close Brothers") has agreed to sell its wealth management business, Close Brothers Asset Management ("CBAM"), to funds managed by Oaktree Capital Management, L.P. ("Oaktree") for an equity value of up to £200 million (the "Transaction").

Transaction Highlights

·    The equity value of up to £200 million, including £28 million of contingent deferred consideration in the form of preference shares, represents a multiple of 27 times CBAM's statutory operating profit after tax for the 2024 financial year[1]

·    Close Brothers intends to retain all upfront cash proceeds from the Transaction of approximately £172 million[2]. The Transaction will strengthen the group's capital base and improve its position to navigate the current uncertain environment

·   The Transaction is expected to complete in early 2025 calendar year and is conditional upon receipt of certain customary regulatory approvals

Mike Biggs, Close Brothers' Chairman, commented:

"Following a comprehensive strategic review, the Board is pleased to announce the agreed sale of CBAM to Oaktree. The transaction is expected to increase the group's common equity tier 1 capital ratio by approximately 100 basis points, marking significant progress towards the plan we outlined in March 2024 to strengthen our capital base. The Board has unanimously approved the transaction and believes that the agreed sale represents competitive value for our shareholders, allowing us to simplify the group and focus on our core lending business. CBAM has delivered impressive growth over the past years and has developed into a strong franchise. Under the new ownership, it will benefit from additional resources to accelerate its growth trajectory. I would like to thank our CBAM colleagues for their dedication, professionalism and exceptional service to our clients."

Federico Alvarez-Demalde, Oaktree Managing Director commented:

"We are delighted that Close Brothers chose to partner with us on this important transaction. We have observed CBAM's progress over several years and hold the franchise in high regard. The business is well known for its client centric culture which we absolutely intend to preserve and nurture as we invest in its service capabilities and technology to build a vertically integrated UK wealth business of scale. In the coming months we will bring to bear our extensive operational experience in the sector to work closely with Close Brothers and ensure a successful separation and transition of the business."

Strategic Benefits of the Transaction

CBAM is a well-regarded UK wealth management franchise with a strong track record, healthy net inflows and significant growth potential. To realise the potential value of the business in the medium-term to the fullest extent possible, Close Brothers would need to continue to invest to accelerate CBAM's growth strategy in the short and medium term, including via acquisitions against a consolidating market backdrop.

Selling its wealth management division at this stage allows Close Brothers to realise a competitive valuation for CBAM and strengthen Close Brothers' capital position. The Transaction also allows the group to focus its resources on its core lending business, where it continues to see good growth prospects and encouraging customer demand.

The Transaction will enable CBAM to accelerate its growth strategy under Oaktree's ownership, which recognises CBAM's value and its potential to become a leading UK wealth manager of scale. In order to achieve this, Oaktree intends to provide CBAM with the incremental investment required to increase its profitability and presence in the wealth management sector.

Following the Transaction, the group will remain focused on executing its strategic objectives for the retained businesses. The group's key priorities in this respect include:

·    Protecting the group's valuable franchise by further progressing the initiatives previously outlined to strengthen our capital position in the current uncertain environment

·    Maintaining the strengths of the group's business model, being our long-term relationships, the extensive expertise of our people and our customer-centric approach

·    Continuing to focus on the prudent management of our financial resources, by retaining our strong capital, funding and liquidity position

·    Maintaining our consistent and disciplined pricing and underwriting criteria, which underpin the quality of the group's loan book

·    Progressing further our tactical and strategic cost management initiatives, as well as the additional cost actions mobilised in March 2024

·    Continuing to explore diversifying revenue streams and growth opportunities at Winterflood, whilst ensuring the trading business remains well positioned to benefit when investor appetite returns

The group remains focused on resuming our track record of earnings growth and attractive returns in our core business and is well positioned to take advantage of future opportunities.

Net Proceeds and Use of Proceeds

Under the terms of the Transaction, the equity value of up to £200 million includes:

·    £172 million of cash to be paid at or before completion of the Transaction ("Completion"), comprising

§      an upfront cash consideration of approximately £146 million payable by Oaktree to Close Brothers on Completion; and

§      a dividend of approximately £26 million payable by CBAM to Close Brothers on or before Completion, subject to applicable regulatory capital requirements; and

·    £28 million of contingent deferred consideration in the form of preference shares.

Close Brothers intends to retain the cash received by Completion, expected to amount to approximately £172 million, gross of transaction costs.

Further details on Contingent Deferred Consideration

The contingent deferred consideration will be in the form of preference shares, redeemable no later than Oaktree's exit, for an amount of up to £28 million plus interest at a rate of 8 per cent. per annum, stepping up to 12 per cent after five years. The deferred consideration is subject to potential deductions, including in relation to retention of key individuals and certain potential regulatory costs and separation cost overruns.

Impact on Close Brothers

Financial impacts of the Transaction on Close Brothers are currently expected to be (based on financials as at 31 July 2024) as follows:

·    The upfront proceeds would increase the group's common equity tier 1 ("CET1") capital ratio by approximately 100 basis points on a pro forma basis. This calculation is based on a net asset value of £121.8 million at 31 July 2024, a tangible net asset value of £66.1 million, and assumes an immediate reduction in credit risk weighted assets ("RWAs") associated with the CBAM business. It does not include any immediate reduction in operational risk RWAs and excludes any capital impact in respect of the contingent deferred consideration. This estimate is subject to change before Completion.

·    The accounting treatment and associated capital impact of the contingent deferred consideration remains under review.

·    Close Brothers' pro forma operating profit before tax for the 2024 financial year would be £131.0 million (representing a £11.0 million adjustment)

·    Close Brothers' pro forma total assets as at 31 July 2024 would be £13,889 million (representing a £192.0 million adjustment)

·   Close Brothers' pro forma total liabilities as at 31 July 2024 would be £12,168 million (representing a £70.2 million adjustment)

Assets of CBAM

As at 31 July 2024, the value of the gross assets of CBAM was £192.0 million. In the 2024 financial year, the profit after tax attributable to the assets the subject of the Transaction were £7.4 million.

Board Recommendation

Close Brothers' Board has unanimously approved the Transaction and believes the terms of the Transaction are in the best interests of Close Brothers and the group's shareholders as a whole.

Next steps/Timing

The Transaction is expected to complete in early 2025 calendar year. The Transaction is conditional upon receipt of certain customary regulatory approvals.

Additional Information

The Transaction is being treated as a significant transaction as per UK Listing Rules due to the agreed maximum total consideration receivable comprising 25.2%[3]of Close Brothers' market capitalisation, which is in excess of the 25% threshold. As such this announcement is made in accordance with Close Brothers' disclosure obligations pursuant to Chapter 7 of the Listing Rules.

Unless otherwise stated, all financial information relating to Close Brothers and CBAM disclosed in this announcement (including the Appendices) has been extracted, without material adjustment, from Close Brothers Group's Full-Year 2022 and Full-Year 2023 published audited financial statements and the unaudited Preliminary Results for the year end to 31 July 2024, on the bases and assumptions set out therein.

The person responsible for arranging for the release of this announcement on behalf of Close Brothers is Sarah Peazer-Davies, Company Secretary.