Toronto-based GMP Capital Inc.’s acquisition of FirstEnergy Capital Corp. should bolster GMP’s position as a leading independent investment firm, but the deal faces challenges in the current environment, says a new report from Toronto DBRS Ltd.
The credit-rating agency’s report looks at GMP’s planned acquisition of FirstEnergy, which was announced last week. DBRS says the deal should strengthen GMP’s position in the energy sector, and complements its already strong position in the mining sector.
“This acquisition would likely advance GMP’s franchise as a leading independent investment bank in Canada,” DBRS’s report says. “Catering to clients in the resources sector is a core strength of GMP, aligning with the company’s previously announced restructuring plans where it is refocusing its franchise on core competencies and markets.”
However, the DBRS report notes that GMP’s restructuring, by streamlining the firm in Canada and closing certain international offices, aims to address ongoing structural and regulatory changes.
“DBRS does not view these structural changes as having gone away, making this acquisition a more challenging transaction given the still uncertain operating environment,” the report states.
Indeed, the DBRS report says the acquisition increases the headwinds already facing the company, including weak earnings and the still difficult operating environment, which is keeping revenue under pressure. With that in mind, the FirstEnergy acquisition “could add pressure on earnings,” the report points out.
“First, there are the costs for integration. Second, GMP is now more reliant on revenue from the energy sector, which could add further pressure if there is not a recovery in energy prices,” the report says.
“This transaction has the potential to elevate GMP’s cost base with the associated integration and compliance costs,” the report adds. “Over the longer-term, DBRS recognizes that the company is likely to realize important synergies on both the revenue and the cost sides, despite near-term challenges.”
In addition, this deal is a sizeable one for GMP, DBRS says. The $98.6-million price, which is to be financed through the issuance of common shares and an unsecured promissory note, is “considerable” relative to GMP’s equity base of $326 million.