Sequoia Financial Group (ASX:SEQ) sells 80% of clearing house Morrison Securities

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Sequoia Financial Group Limited (ASX:SEQ) CEO and Managing Director Garry Crole discusses the 80 per cent sale of Morrison Securities to New Quantum.

Tim McGowen: We're talking today with Sequoia Financial Group (ASX:SEQ). The company is an integrated financial services group providing products and services to self-directed retail and wholesale clients, and those of third party professional service firms. It's got an ASX code of "SEQ" and a market cap of $70m. We have with us Mr Garry Crole, who's the Managing Director. Garry, thanks for your time.

Garry Crole: Thank you, Tim.

Tim McGowen: Now, first up, Garry, Sequoia obviously owns this network. It owns ShareCafe and Corporate Connect, our research business. And, for full disclosure, both yourself and myself are shareholders in Sequoia.

Garry Crole: Absolutely.

Tim McGowen: Now, today you've announced the 80 per cent sale of the clearing business, Morrison Securities. Can you give us some background on the deal?

Garry Crole: Yeah, absolutely. We love the Morrison's business. Sequoia has acquired this business for $5m several years ago, maybe five or six years ago, and built the business. Sequoia currently has $15m cash on its balance sheet, and $10.5 of that $15 million sits within Morrison. So, it takes up a lot of our cash, and it's got now to the point where it's growing so quickly, and we want to do so many more things with it, that to take that next step we would need to deploy more cash. So, we had a think about it and we looked around the market, and worked out how can we best grow this business, maintain some equity in that business to allow it to grow? And we found a partner that is a fintech business, is a platform business, and they really have strong visions to grow this business. And we selected to sell 80 per cent of this business over a period of time to them, to allow this business to grow far quicker, do more things and provide more services to our customer base.

Tim McGowen: And I didn't add that it is a partial sale. It's an 80 per cent sell down. That's correct, isn't it?

Garry Crole: Yeah, that's right. So, there's a three-payment process. So, initially they're paying a deposit, which falls due on 20 March, so early. So we'll receive $10.5m on 20 March. Before May, we'll receive another $15m, which will take them to 50 per cent ownership. We will still maintain board control. And then a final payment before August of another $15m will come into the accounts. At all times throughout that process, they obviously have… They may not settle, and we have rights to take back 100 per cent of the business and return 70 per cent of the proceeds that we've received to date. So, there's a 30 per cent poison pill, if you like, for them not settling. Clearly, we don't want that to happen. But if it does, the Sequoia shareholders would get a material profit, and we'd continue to own and run the business.

Tim McGowen: And who is the actual buyer? You've touched on it's fintech. Can you name them and give us some background, particularly on their ability to finance this transaction?

Garry Crole: Yeah, sure. So, the company is New Quantum. They're building a platform in the same manner as, say, the Hub24, Netwealth, Praemium, Macquarie Wrap, BT Wrap type platform business. They're looking to take this to the new world. One of the things that we like about it is the cost of advice is increasing. The cost of everything in respect to consumers getting access to financial services is increasing. They're looking to help reduce the cost of owning a platform, and owning the clearer in that process will help that. They've got backing from Asia. They've got long-term history in financial services markets. We have met their backers. So we met their financiers, some of their investors, prior to signing this binding term sheet. And they have a lot more capital to invest in this business to take it to the next level. And maybe, one day our 20 per cent holding might be worth more than the current holding. So, that's our dream. All the staff will remain. The service won't change. It's a real positive for the clients and I think it's a real positive for Sequoia as a minority shareholder, but long term for everybody.

Tim McGowen: And I was going to ask about the counterparty and what this actually means. There's a new counterparty, obviously with Morrison Securities post these payments. What does that mean for Morrison's existing clients?

Garry Crole: Yeah, there'd be absolutely no change. I think the only thing that the Morrison clients can expect to occur is additional services. So, for example, we would like to have an improved order pad. Currently, we use Bourse Data or we use IRESS order pads. We would like to develop our own. That will not only provide an IT tech platform for Morrison's, but it will help reduce the cost of serving and provide better service to the end client. We would like to trade in bonds and fixed interest products. We would like to have an improved tax reporting and reporting functionality for self-managed super funds and end clients straight from Morrison's. So, all of those things are possible under this type of merger. And New Quantum, that's what they do. You know, they've built platforms before. They were part of building the O2 platform. They've got some really good people, and they've got some really good funding to take this business to the next level, and Morrison's will be core to them. It will be a high priority for the next 12 months to build this to a much bigger business.

Tim McGowen: And so what does all this mean for Sequoia's shareholders? I mean, obviously there'd be a much improved balance sheet. We may have cash of $40m, is it?

Garry Crole: So, we'll have $40m plus about 5 that we currently have. So, the $10.5m that sits in Morrison's is staying in Morrison's because it needs to stay in there for working capital and core capital to meet the ASX requirements. That stays. We'll receive $40m. We have 5 additional million, so we'll have $45m cash, no debt. We'll also have the current $15m facility that we have with ANZ for acquisition. So, we'll have a bank of $60m available for us to make investments. What we do with that, come 31 August, when all of this settles, we'll make the decision at that time, whether we use all of it to make further acquisitions. We have $30m of franking credits on our balance sheet, so we're in a position to pay high dividends. But certainly we will definitely move to a far higher payout ratio on our profit than we have told the market before. We told the market we were going to go to 40 per cent, 50, 60, 70 over time. I think we'll move closer to a 100 per cent payout ratio come next financial year.

Tim McGowen: Garry Crole, thanks for your time.

Garry Crole: Thanks, Tim.

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