Close Brothers Group plc

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Close Brothers Group plc

10 Crown Place
London EC2A 4FT
United Kingdom
Telephone: (+44) 20 7426-4000
Fax: (+44) 20-7426-4044
Web site: http://www.closebrothers.co.uk

Public Company
Incorporated: 1878
Employees: 1,365
Total Assets: £2.6 billion ($3.7 billion)
Stock Exchanges: London
Ticker Symbol: CBG
NAIC: 523110 Investment Banking and Securities Dealing; 522293 International Trade Financing

Small but steady Close Brothers plc is the last independent merchant bank in the United Kingdom. In an era that has seen its competitors gobbled up by the banking industry’s global giants, Close Brothers has carved out a strong niche among the United Kingdom’s small and mid-sized businesses often neglected by the larger banks. Close Brothers, which is set up as a confederation of some 30 businesses, each with its own management team and board of directors, operates in three primary areas: Merchant Banking, including corporate finance and asset management activities; Asset Finance; and Market-Making. The latter division, led by subsidiary Winterflood Securities, is also the company’s rainmaker, contributing more than 60 percent of Close Brothers’ 2000 operating profits. The bank boasts 25 years of unbroken profit growth, which, aided by the company’s strong market-making presence in the high-technology sector, jumped past £380 million with the boom of so-called “dot.com” companies. Close Brothers is led by Chairman David Scholey, former head of SG Warburg, who joined the bank in 1999, and founding member of the “modern” Close Brothers, managing director Roderick D. Kent.

Gold Fever Beginnings in the 19th Century

The Close family had been prominent bankers for more than 100 years before W.B. Close and his brothers founded their own banking and investment firm in the late 1870s. Englishman James Close had traveled to Sicily, setting up “merchant” operations, a name popularly used by investment and banking firms of the era. In 1856, James Close set up a new business in the Kingdom of Naples—before that city was included in the formation of the modern Italian state. Close was no mere merchant, however. Acting as financial advisor to Neapolitan King Ferdinand II, Close was to be granted the status of cavalier. Upon the death of Ferdinand in 1859, Close retired to his yacht and devoted himself to raising his numerous children.

Among these was William Brooks, known as W.B., the sixth Close child, who was born in 1853. When W.B. was 12 years old, James Close died, and W.B. and his brothers were sent to school in England. W.B. and brothers James and John were all rowing enthusiasts, joining the team at Trinity College at Cambridge; another brother, Frederick, chose not to continue his education, and instead journeyed to the United States to become a West Virginia farmer.

A regatta in Philadelphia brought W.B. to the United States in 1876; while there, W.B. met up with a family from Illinois, who invited him out to tour the prairies of Iowa. The family—W.B.’s future in-laws—had been making a fortune buying up public land and selling parcels to the growing number of settlers moving west in the post-Civil War era. W.B. soon was joined by brother Fred, and, together with James Close, they formed the Close Brothers partnership, based in London.

The brothers hit pay dirt on their first try, buying up nearly 15,000 acres for just US$35,000. At less than US$2.50 per acre, the Close Brothers stood to make a handsome profit and the beginning of a new family fortune. Yet the company already showed itself as an investment house, rather than seeking mere profits. The Closes recruited settlers from the United Kingdom, and then taught the new farmers proper farming techniques for Iowa conditions. Close Brothers even went so far as to set up its own agricultural college.

The partnership opened its first office in Sioux City, then moved to Chicago, where it began to work closely with First National Bank of Chicago as the Close Brothers looked farther afield for their next investment opportunities. The company’s British branch also had continued to grow, and in 1888, the partnership formed a subsidiary operation, Mortgage and Debenture Co. Ltd., for its business interest in the United Kingdom. By the end of the 19th century, however, Close Brothers was put to the test. A long depression had devastated its Iowan investment interests, and the Close Brothers struggled.

The great Alaskan gold rush provided the partnership with its next claim to fame. Prospectors rushing to Skagway, Alaska were required to cross the treacherous White Pass to reach the gold-rich Klondike region. In 1897, Close Brothers bought the right to construct a railway to link Scagway to the Yukon region, including building a bridge across White Pass. Close Brothers sent their representatives to Scagway, and construction got under way in 1898.

While in Scagway, the Close Brothers representatives met Michael Heney, a Canadian surveyor with railroad experience, who had recognized the potential for building a railroad linking the Yukon River with the Pacific Ocean and had begun surveying the proposed route. Close Brothers quickly agreed to back Heney’s plan. Close Brothers’ investment reached some US$7 million over the life of the project, which continued into the years leading up to the First World War.

Transformations in the 20th Century

The White Pass & Yukon Railway gave Close Brothers a degree of fame as a member of the rather exclusive club of railroad magnates at the turn of the century. The company’s chief source of revenues continued to come from its Midwest mortgaging business and the railway, but the bank also began loaning to the mining and other industries. Another growing source of income was the company’s banking, investment, and lending activity among a select group of private individuals—for the most part from W.B. Close’s circle of aristocratic friends. In 1909, Close Brothers added two new partners, W.H.B. Stevens and J.P. Cushing, and reincorporated as a London-based private company. The American operations were incorporated subsequently as a subsidiary to the London firm.

The private company was reincorporated again after the death of W.B. Close in 1923. By then, the company had shut down its Chicago banking operations and its center of activity began to shift to its London banking operations. The appointment of Arthur Martens as chairman in 1934 breathed new life into the bank, which had greatly reduced the scope of its operations in the decade following W.B. Close’s death. Under Martens, Close Brothers began developing a new area of investment interest—in the mid-1930s, Martens led Close in establishing the South Western Gas Corporation, a holding company that went on a buying spree, acquiring some 100 small gas and electric utility companies operating in the United Kingdom’s then highly fragmented utility industry. South Western Gas became the dominant utility company in its southwestern England region and remained in operation until the nationalization of the United Kingdom’s utility industries at the end of the Second World War.

Although Close Brothers continued to control its railroad, it ceded the lease to the United States government during World War II. In the years following the war, the company switched its attention to new investment endeavors. Among these was the formation of Bramalea Consolidated Developments Ltd., set up in Canada to finance the development of a new town, located near Toronto, for a total investment of some $80 million. Close Brothers was also behind the financing of a new type of “floating diamond mine,” designed to mine diamonds from beneath the waters off the African coast in the 1960s. That project proved a flop, however. More successful were its investments in more traditional mining, utility, property, and banking projects. In the 1960s, Close Brothers was behind the listing of Purle Brothers Holdings, which later became known as Redland plc.

Arthur Martens’s death in 1964 led the company into a new transformation. Martens’s successors, including son Fraser Martens, were unable to match the bank’s former success, and by the early 1970s Close Brothers was losing money. In 1970, Close Brothers was bought up by Max Maimann, who had fled to England from Austria during the Second World War and who had already launched two successful public companies. Maimann quickly sold off most of Close Brothers’ money-losing North American interests—which by then nonetheless represented the majority of the bank’s active operations—and restored the banks’ profits by 1972. In that year, Maimann sold more than 45 percent of Close Brothers to London & Western Trust.

London & Western Trust had been set up by Michael Morley, James Leek, and other colleagues at merchant bank Samuel Montague. The young team—Morley was just 32 years old—sought for London & Western Trust to be a merchant bank. Acquiring Close Brothers turned out to be London & Western’s fastest route to a position in the banking industry. Morley et al quickly revived Close Brothers’ diversified interests, developing new property lending and corporate finance activities. The bank soon took on a specialized focus as a lender to smaller companies usually bypassed by larger institutional lenders.

Company Perspectives:

Close Brothers’strategy is to provide a diverse range of specialist services where we believe we can offer added value to our clients as a result of our particular expertise. Close Brothers is dedicated to developing continuity in its relationships with clients through excellent service, quality advice and uncompromising professionalism. We have concentrated on building up a balanced mix of activities in the financial sector and our aim is to deliver to our shareholders a consistent and, over time, increasing stream of profits and dividends.

As the United Kingdom’s property market headed into slump in the mid-1970s, Morley and his team sought to boost the company’s operations into more high-volume activities. London & Western turned to Consolidated Goldfields, a mining industry finance and investment house, seeking to buy out Consolidated’s export finance operation. Goldfields turned Close Brothers down—and instead proposed to acquire London & Western itself. Morley and partners agreed, receiving more than £2.7 million. Morley was appointed head of Consolidated’s newly enlarged finance wing, while James Leek took over as head of Close Brothers. Leek left the bank in 1975, placing Rod Kent, who had just completed a degree at the prestigious Parisian INSEAD business school. At the age of 27, Kent was faced with negotiating Close Brothers through the deep recession of the late 1970s.

By 1978, Morley and Kent were joined by two other partners to lead a management buyout of Close Brothers from its Consolidated Goldfields parent. The team attracted a number of institutional investors, including London & Yorkshire Trust and Safeguard Industrial Investments, successfully breaking away from an initially reluctant Consolidated Goldfields. Morley left Close Brothers in 1981, joining rival merchant bank Charterhouse, before returning to Close Brothers in 1985.

By then, Close Brothers had transformed itself, as the small bank went on an acquisition drive to build new product areas. Between 1982 and 1987 the bank acquired a number of companies, including Century Factors, which was renamed as Close Invoice Finance, and then Air and General Finance, a lending company to the aircraft industry. The company also launched its PROMPT insurance premium finance vehicle. Yet Close Brothers’ most ambitious move was its reverse-takeover of principal investor, Safeguard, which, valued at £21 million, dwarfed Close Brothers, which was then valued at less than £4 million. The reverse takeover was finalized in 1984.

The following year, Close Brothers made headlines when it rescued struggling British computer company Acorn Computers and orchestrated that company’s acquisition by Olivetti. Close Brothers also was achieving success away from the spotlight, such as advising Caledonia Investments on its £427 million pullout from British & Commonwealth Holdings—effectively rescuing Caledonia’s shareholding when B&C collapsed at the end of the decade. Caledonia became a major investor in Close Brothers, building up a 20 percent stake before the 1990s.

Close Brothers continued making acquisitions, expanding its areas of operations. While the merchant bank guided overall strategy, its subsidiary operations remained, in large part, independent, retaining existing management and headquarters. As the United Kingdom headed into a new recession in the early 1990s, Close Brothers was presented with new acquisition opportunities. Among the companies acquired at this time were the soon-to-be-named Close Brothers Investment, a specialist in BES transactions, and Close Consumer Finance, adding automobile financing operations, both acquired in 1991. The following year, Close Brothers added Business Advisory Services.

One of Close Brothers’ most significant acquisitions was that of Winterflood Securities, a leading market-maker for small company stocks, which the company bought in 1993. The £19 million purchase price placed Close Brothers in a front spot for the coming explosion of high-technology stock listings. By the late 1990s, the Winterflood operations were to grow to represent some 60 percent of Close Brothers’ operating profits. Meanwhile, the company was absorbing another major acquisition, that of the Hill Samuel corporate finance wing of Lloyds TSB Group. Funding Close Brothers’ growth was a new rights issue, which raised more than £50 million for further investments. In 1995, Close Brothers boosted its investments side with the launch of Close Fund Management and a new range of trust and fund products dubbed Escalator.

Founding partner Peter Stone left the company in 1998. A year later, the bank lost another of its founding buyout partners when Michael Morley died. The bank found a new chairman in David Scholey, who had served as chairman of SG Warburg before its acquisition by Swiss Bank Corporation. Scholey, with Rod Kent as chief executive, quickly found themselves in the spotlight when a news leak in 2000 revealed that French powerhouse bank BNP-Paribas had approached Close Brothers with an acquisition offer. As the last remaining independent merchant bank in the United Kingdom, many analysts began to wonder for how long Close Brothers would be able to resist future acquisition offers.

Key Dates:

1878:: W.B. Close and brothers found Close Brothers partnership.
1897:: Company acquires right to build Skagway-Yukon rail line.
1898:: Company begins construction of White Pass and Yukon railroad.
1909:: Company reforms as private company.
1923:: W.B. Close dies.
1934:: Arthur Martens becomes chairman.
1935:: Company launches South Western Gas Corporation.
1955:: Company begins Bramalea Consolidated Developments investment in Canada.
1970:: Max Maimann acquires control of Close Brothers.
1972:: London & Western Trust acquires Close Brothers.
1973:: Consolidated Minefields acquires London & Western Trust.
1978:: Management buyout of Close Brothers occurs.
1984:: Reverse takeover of Safeguard Industrial Investments is finalized.
1987:: Air and General Finance is acquired.
1991:: Close Brothers Investment is formed; Close Consumer Finance is acquired.
1993:: Winternflood Securities is acquired.
2000:: Company acquires Braemar Finance (87 percent) and Transamerica Insurance Finance Company.

Meanwhile, Close Brothers continued to invest in its own growth, acquiring Rea Brothers to boost its fund management wing, and Warrior, a financial services provider to the United Kingdom’s armed forces, both in 1999. In 2000, Close Brothers began boosting its international presence, buying 50 percent of France’s Dôme & Cie, as well as extending its products with the acquisitions of optical equipment finance house Braemar Finance and the European insurance finance wing of Transamerica Insurance Finance Company, a subsidiary of Transamerica Financial Corporation. Close Brothers appeared determined to maintain its independence into the new century.

Principal Subsidiaries

Air and General Finance Limited; Close Asset Finance Limited; Close Brothers Corporate Finance Limited; Close Brothers Equity Markets S.A.; Close Brothers Investment Limited (98%); Close Consumer Finance Limited (98%); Close Credit Management (Holdings) Limited (99%); Close Fund Management Limited (90%); Close Investment Limited (92%); Close Investment Management (Isle of Man) Limited; Close Invoice Finance Limited (95%); Close Trustees (Switzerland) S.A. (70%); Close Wealth Management Limited (88%); Dôme Close Brothers S.A. (50%); Freyberg Close Brothers GmbH (60%); Mortgage Intelligence Limited (75%); Surrey Asset Finance Limited (83%); Transamerica Insurance Finance Corporation; Winterflood Gilts Limited (95%); Winterflood Securities Limited (95%).

Principal Competitors

3i Group plc; Abbey National plc; Bank of Ireland; Barclays plc; Charles Schwab; Goldman Sachs; HSBC Holdings; Jefferies Group; Legg Mason; Lloyds TSB; Merrill Lynch; Natexis; Royal Bank of Scotland; Schroders; Singer & Friedlander Group; St. James’s Place Capital; UBS Warburg.