Regions Financial: Morgan Keegan seen attracting MF Global

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Broker dealer MF Global (NYSE:MF, BBB-/Baa2) has emerged as a contender to acquire Regions Financial’s (NYSE:RF) Morgan Keegan unit, two sources briefed on the matter said.

Bidders for the Memphis-based retail brokerage and investment bank are in the middle of conducting two weeks of due diligence, said one of these sources, a third source briefed and an industry source. Second round bids will probably occur after Labor Day, a second industry source added.

A Regions spokesperson declined to comment. The Birmingham, Alabama-based regional bank said it hired Goldman Sachs in June to find a buyer for Morgan Keegan. MF also declined comment.

MF Global issued 6.25% USD 325m senior notes last week, a coupon that indicates the market demanded an unusually high risk premium, according to media reports. In late July the company issued a 3.375% USD 325m convertible note.

Under the command of CEO Jon Corzine, New York-based MF has been trying to turn itself from a futures brokerage firm into a mid-sized investment bank. MF ended 2Q11 with 709m in cash and USD 417m in long-term and USD 366m of short-term borrowings. In March, MF appointed its then CFO Randy MacDonald as global head of its retail business with the mandate to capitalize on “considerable international growth opportunities.”

Beyond MF, the Morgan Keegan auction is largely down to private equity bidders, according to the three sources briefed and the second industry source. The third source said it was his understanding that Regions and Morgan Keegan have largely tailored management presentations, which have not yet concluded, to appeal to financial sponsors.

Recent market turmoil has complicated the auction, with the stocks of potential strategic suitors Stifel Financial (NYSE:SF) and Raymond James Financial (NYSE:RJF) both down 20% over the past 30 days and debt financing for private equity bidders becoming more expensive. Goldman has been conveying to at least some bidders that 3x to 4x leverage can be used to purchase Morgan Keegan, said the third source briefed. The first source said this leverage ratio is likely too high.

A private equity source said he is skeptical about investing in brokers given the businesses are people-dependent and the track record for past deals is anything but strong. Any buyer will have to structure the deal to ensure key management remains in place, said two of the sources briefed and the second industry source.

The larger question is will a buyer willing to acquire a retail brokerage business that will face headwinds in the current economic environment, the second industry source said. This source questioned whether Regions will elect to delay the Morgan Keegan sale since it has until 2013 to repay its USD 3.5bn government bailout without penalty. But the third source briefed said he remains confident a deal will happen.

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