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Friday, August 22, 2008 1:16 PM

CI dream deal a nightmare for Sun Life

Andrew Willis

Back in 2002, Sun Life Financial handed CI Financial the keys to its Canadian mutual fund franchise.

Six years later, CI is poised to drive away with that fabulous franchise. Is this something the insurer can tolerate?

CI was built in part on the back of a deal in 2002 that saw Sun Life sell it two fund companies - Spectrum Investment Management and a unit of Clarica Life Insurance. In exchange for these units, Sun Life took a 30-per-cent stake in CI. At the time, the transaction added $13.2-billion of assets to CI's portfolios, taking the company up to $39-billion.

Right now, that looks like a great trade. Sun Life acquired a stake valued at $860-million, and 30 per cent of the country's No. 3 mutual fund company is now worth $2-billion, reflecting the fact that CI is now home to $102-billion in assets.

However, that 2002 deal takes on a whole different look if Sun Life entrusted its domestic mutual fund strategy to CI, only to see the company end up in the arms of another financial institution. And that just may be happening.

CI confirmed Friday that it is in talks with “a number of parties over possible strategic combinations.” A deal that would see Bank of Nova Scotia emerge with a minority stake in the mutual fund company is said to be among the options on the table.

Having to share CI with a rival is a terrible strategic development for Sun Life. Yet there's not much the insurer can do. There is speculation Friday that Sun Life has minimal rights attached to its CI holding. It's quite possible CI cuts a deal with a new partner that doesn't require shareholder approval.

The scenarios get even worse for Sun Life if the mutual fund company does end up attracting a full-blown takeover offer - the dream outcome for unitholders in CI.

CI has a $6.4-billion market capitalization. Even with a sizeable existing stake, buying the whole company would put an enormous strain on Sun Life. CEO Don Stewart and the board will face difficult decisions on what to do with what's now a 37 per cent postion in CI.

Buying CI is likely not the best use of Sun Life's capital - the insurer has a $22-billion market capitalization and has made international expansion its priority. But letting go of high ground in the domestic mutual fund field, even at a premium price, is not an attractive option for a life insurer in a mature, consolidating sector.

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Streetwise Contributors

Andrew Willis

Andrew Willis joined The Globe and Mail in September of 1995. His career has included stints at a number of publications, including The Financial Post, The Financial Times of Canada, Dow Jones/Wall Street Journal, and MacLean's magazine. He also did freelance writing for Investment Executive magazine. He appears on television for BNN TV and CBC Newsworld.

Andrew has co-written a book, The Bre-X Fraud, with business journalist Douglas Goold.

Read Streetwise Tuesday through Friday in the pages of Report on Business.

 
Boyd Erman

Boyd Erman

Boyd Erman is a long-time business journalist who has worked at Dow Jones, Bloomberg, and the National Post before joining the Globe and Mail. Over the years, his areas of coverage have included economics, monetary policy, debt markets and corporate finance.

In addition, he is a regular commentator and guest host on Business News Network.

 

Steve Ladurantaye

Steve Ladurantaye wrote about technology companies in Ottawa before reporting for the Peterborough Examiner and Kingston Whig-Standard, where he won a National Newspaper Award for explanatory journalism. After joining the Globe and Mail in 2007, his work has regularly appeared in Report On Business and Globe Investor Magazine.

 
Globe and Mail reporter Tara Perkins

Tara Perkins

Tara Perkins has been a business reporter since 2004, following a brief stint as overnight editor of globeandmail.com. She has been writing for the Globe's business section since the spring of 2007, covering the banking sector during the course of the financial crisis. Prior to that, she worked for the Toronto Star. Tara has a Bachelor of Journalism from Ryerson University and a Bachelor of Commerce from the University of Guelph.

 
 

Jacquie McNish

Jacquie McNish has been a business writer with The Globe and Mail since 1988. Prior to that she was a reporter with The Wall Street Journal.

During her time at The Globe and Mail, she has served as the paper's New York correspondent and won three National Newspaper Awards. She is the author of The Big Score: Robert Friedland and The Voisey's Bay Hustle and Wrong Way: The Fall of Conrad Black, for which she and co-author Sinclair Stewart won the National Business Book Award. She is a co-host of Market Morning on the Business News Network.