B. Riley Buying Big Stake in National Securities
(Corrects spelling of B. Riley CEO’s given name in third paragraph, updates closing prices of companies’ shares in last paragraph.)
B. Riley Financial, which bought independent broker-dealer Wunderlich Securities last year to help distribute its investment banking and lending deals, has agreed to acquire a big stake in the parent of National Securities, another small broker-dealer with about 700 advisors, the companies said on Monday.
California-based B. Riley will pay $22.9 million to buy Fortress Biotech Inc.’s 56.1% interest in New York-based National Holdings Corp., but will allow National to operate independently under its existing name and management. Wunderlich now operates as B. Riley Wealth.
“We want to be a supportive investor, but make it clear that National’s management is in charge,” B. Riley Chairman and Chief Executive Bryant Riley said in an interview, noting that he is likely to reduce the company’s majority stake to 49% through a private placement offering.
Riley insisted that he is buying at a good price, well below “enterprise value,” because Fortress Biotech is a motivated seller.
“We react to opportunity, and we have a lot of product,” he said, alluding not only to deals underwritten by B. Riley FBR, the former Friedman Billings & Ramsey investment bank the firm bought last year, but also to proprietary products such as second-lien loans originated by subsidiary Great American Capital Partners, which specializes in bankruptcy situations.
With interest rates rising and equities becoming more volatile, Riley also said that retail brokerage is attractive because investors will likely need more than automated robo advice to help manage their portfolios.
For Fortress, the deal gets it out of a sticky situation. The biotech company invested in National Holdings in 2015 when the financial firm was in need of capital. However, its stock price has plunged in the wake of a Reuters report last summer suggesting that the firms were ramming sales of Fortress issues to unsophisticated National Securities investors without proper disclosure.
National, whose registered rep force is largely made up of independent contractors, itself has been on a rebuilding campaign. Since a management reorganization almost two years ago, it has dismissed just over 300 brokers who were generating more than $30 million but who had an outsized number of complaints from customers and regulators.
National Holdings Chairman and Chief Executive Michael Mullen said the broker-dealer unit was never pressured to distribute deals on behalf of Fortress, adding that the biotech deals represented less than 1% of its deal flow. But he conceded that the optics were not good.
“Having a true strategic as our largest shareholder will be far better,” he said in an interview. “I still cherish our independence, and today’s announcement is reflective of that.”
Riley, who had been a National Holdings director, said he had made a bid to buy National Holdings prior to its decision to sell the majority stake to Fortress but has no resentments.
“Mike’s done a very good job of making changes in the culture and the operation,” he said of Mullen.
As part of B. Riley’s three-year “standstill” pact with National, it has agreed to retain “observer rights” only on National’s board, the companies said. Riley said he will be one of the observers, and has not yet decided on the second.
Fortress sold the first 3.01 million tranche of its stake to B. Riley on Friday, but transfer of the remaining 4.03 million shares requires approval from the Financial Industry Regulatory Authority.
The purchase price in both tranches is $3.25 a share. Under its standstill pact, B. Riley also cannot invest in new stock or convertible debt of National Holdings for three years if it is issued at more than $3.25 a share.
National Holdings stock closed at $3.09 on Monday, up 3.0%. Shares of Fortress Biotech soared by almost 15% after the announcement, before closing up 6.5% at $1.31. B. Riley shares closed down by 1.13% at $17.52.