By Ianthe Jeanne Dugan And Telis Demos
Benjamin Lorello, Jefferies LLC's investment-banking chief,
spent years cultivating his relationship with executives at Sirona
Dental Systems Inc., helping the small-but-promising health-care
company raise money and providing advice on acquisitions.
But when Sirona sought an investment bank to lead a $235 million
secondary stock offering in 2011, it chose Barclays PLC, because it
made "an aggressive offer" to back the entire deal, said Jeffrey
Slovin, Sirona's chief executive. Sirona also selected Barclays to
lead a bigger secondary offering of $542 million later that
year.
As Jefferies evolves from its roots as a trading firm to a
midtier investment bank, it is knocking up against far larger
financial firms vying for business, often from companies Jefferies
helped to expand. Jefferies has often worked with smaller firms on
transactions that bigger rivals may not pursue. As these customers
get larger, the competition intensifies as they are courted by
bigger financial firms.
In 2014, Jefferies has been a lead underwriter on 25 U.S.-listed
initial public offerings of health-care-related companies, topping
all other investment banks, according to data provider Dealogic.
But Jefferies ranks just eighth in net revenue generated by U.S.
health-care banking overall--which includes stock and bond
offerings, loans and merger advice--generating $196 million in
revenue, trailing No. 1 J.P. Morgan Chase & Co.'s $639 million.
"Investment banking has always been highly competitive," Jefferies
Chief Executive Richard Handler said in an interview at his office,
just off the trading floor.
The firm isn't attached to a bank holding company and therefore
has more flexibility in how it structures deals and compensates
employees. This entrepreneurial structure was part of the allure
when Mr. Lorello moved to Jefferies in 2009 with more than 30
health-care bankers, according to people familiar with the firm.
Jefferies is a unit of Leucadia National Corp. and has net revenue
topping $3 billion.
"Our competitive advantage has never been stronger in the 25
years I have been at Jefferies," Mr. Handler said.
Mr. Handler is particularly protective now. In an October memo
to clients, he said rivals fanned rumors after Jefferies's
health-care chief, Sage Kelly, took a voluntary leave in October.
In a custody dispute, Mr. Kelly's wife accused the banker, along
with some colleagues and clients, of drug use and claimed she was
involved in a sexual tryst with a Jefferies client.
The firms denied the allegations, and Mr. Kelly's wife has
issued an apology. Mr. Kelly, 42 years old, remains on leave.
Mr. Lorello, 61, who is running the health-care group in Mr.
Kelly's absence, declined to comment, as did Mr. Kelly.
Mr. Handler said the health-care business hasn't slowed. In the
month since the episode erupted, the firm has been hired to work on
28 new health-care deals, he said.
Jefferies has about 90 people now focusing strictly on health
care, spotting promising startups and pushing hard to win work from
bigger companies. The group has accounted for nearly 22% of the
firm's U.S. investment-banking net revenue this year, according to
Dealogic.
Clients said Mr. Handler, 53, often is directly involved in
deals.
"I don't know the head of Deutsche Bank, but I know the chief
executive of Jefferies," said Tilman Fertitta, chief executive of
Landry's Inc., a $3 billion restaurant group that has worked
closely with Mr. Lorello and other top executives.
During a financial crunch in February 2007, Landry's had to
refinance bonds. "The whole senior management team got involved and
got it done," Mr. Fertitta said. "I'll never forget that."
The involvement of top Jefferies executives helped the firm win
business to manage Ardea Biosciences Inc.'s follow-on offerings of
stock in 2010, 2011 and 2012. But when Ardea was acquired by
AstraZeneca PLC in a roughly $1.3 billion deal in 2012, Ardea
worked with Bank of America Merrill Lynch as financial adviser.
A Jefferies spokesman said a pre-existing merger-and-acquisition
engagement with Bank of America Merrill Lynch led its bigger rival
to win the Ardea deal. Jefferies, however, has continued to push
hard and won subsequent work with Ardea executives when they formed
a new company.
Among larger clients, Jefferies advised Valeant Pharmaceuticals
International Inc. on its roughly $3.2 billion merger with Biovail
Corp. announced in 2010. It has also advised Pfizer Inc. The firm
has worked on 18 health-care deals bigger than $1 billion this
year.
But sometimes it takes smaller roles with smaller fees. For
representing Chiesi Farmaceutici SpA in its complete acquisition of
Cornerstone Therapeutics Inc. announced in 2013, it received
$800,000 in fees, compared with $2.9 million paid to Lazard Ltd.
for representing Cornerstone.
Jefferies said its fees were lower because it didn't have to do
as much work on the Chiesi side, partly because Chiesi already
owned part of Cornerstone.
Meanwhile, bigger banks are courting Jefferies's clients as
those companies expand.
"We have never worked with another bank," said Chris Tanner,
chief financial officer of Cosmo Technologies Ltd., which was
advised recently by Jefferies on a potential $2.7 billion deal with
Salix Pharmaceuticals Ltd. (The deal was canceled.)
"We get calls from other banks all the time now," he said.
Dana Mattioli contributed to this article.
Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com and Telis
Demos at telis.demos@wsj.com
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