Rothschild's old pal may learn the true cost of friendship

PUBLISHED : Thursday, 23 June, 2005, 12:00am
UPDATED : Thursday, 23 June, 2005, 12:00am

Yesterday's acquisition of a 20 per cent stake in the parent of banking group NM Rothschild by Jardine Strategic Holdings has more than just a hint of old friends cosying up together.

The two companies have been doing business since 1838, and according to David de Rothschild, the chairman of the bank, his family has been friends with the Keswick family, which controls Jardines, 'for many, many years'.

Who better, then, than Jardines chairman Henry Keswick to step in and help out his old pals the Rothschilds when they were looking for an amicable investor?

Jardines bought its stake from another old Rothschild associate, Britain-based insurer Royal & Sun Alliance.

Alliance Assurance was founded by Nathan Rothschild in 1824 and its descendant has owned a stake in the bank for the past 25 years.

But as a listed company - unlike Rothschild - Royal & Sun is subject to the discipline of the stock market, and recently the vultures have been circling. Since the end of 2000, Royal & Sun's shares have shed 80 per cent of their value, prompting the insurer to divest assets to stave off potential takeovers.

For the Rothschilds, Jardines is the ideal candidate to replace Royal & Sun. As another family-controlled firm, with similarly gentlemanly management, Jardines looks to be a safe pair of hands for a long-term passive shareholding.

What is more, Rothschild's bosses hope that the Jardines connection will help to open corporate doors for them in Asia where they have long lagged behind their better-capitalised rivals in generating investment banking revenues.

Rothschild is hoping to carve a niche in Asia as a pure corporate adviser. But despite some impressive client names - including the Shanghai government and, of course, Jardines - the bank has a long way to go before it will be able to replicate the success it enjoys on its home turf.

Whereas Rothschild ranked No1 in Europe last year in the league table of mergers and acquisitions advisers, it failed to make the top 10 in Asia.

In the past, Asian companies have resisted paying extra for corporate financial advice, especially as investment banks have tended to bundle it in free with their capital-raising services. But as clients become more sophisticated, argues Andrew Rickards, Rothschild's managing director in charge of Asian investment banking, the market for paid disinterested advice will grow.

Jardines director Rodney Leach agrees. 'There is always room for someone - not one of the mega-banks - with only the interest of the client at heart,' he said.

Jardines' small shareholders had better hope he is right because the company's investment in Rothschild does not make much sense otherwise. Last year, the bank made a respectable, if somewhat small, operating profit of GBP78.27 million ($1.1 billion).

However, 75 per cent of that went straight into the pockets of directors and employees as their profit share. Only GBP12.5 million was disbursed to shareholders in the form of dividends.

Assuming a similar payout this year, Jardines will earn a dividend of GBP2.5 million on its GBP101 million investment - a miserable return compared with the yield it earns on its portfolio of Hong Kong properties. But who would put a price on friendship?