It’s a guessing game as to what Bank of Nova Scotia BNS-T willl do with its stake in CI Financial Corp. CIX-T
And speculation mounted this week that the bank might try to buy the 65-per-cent of CI it does not own after Scotiabank filed a $12-billion shelf prospectus to raise debt.
But CI’s chief executive officer Bill Holland also said Wednesday that another possible scenario is for the bank to sell its mutual funds to CI in exchange for increasing its ownership stake in the wealth management firm.
It’s one of four options in addition to doing nothing, selling the stake or buying the rest of CI, Mr. Holland said in an interview. “What they want to do is out of our hands...I don't have a clue."
GMP Securities analyst Stephen Bolland raised the fund-swap scenario in a report Wednesday after a conversation with CI's senior managers.
“Using an estimated purchase price of $1-billion (which we believe is reasonable) we note that at current prices, CI would need to raise 47.3-million shares to purchase Scotia’s mutual fund operations,” Mr. Bolland wrote. “This would increase Scotiabank’s ownership of CI from 35.8 per cent to 44.7 per cent post-deal.”
Scotiabank became CI’s largest shareholder after buying Sun Life Financial Inc.’s interest in a $2.3-billion cash-and-stock deal in 2008. See Globe and Mail story.
“In the past, we did not believe that such a deal would occur as it would increase Scotiabank’s ownership of CI above the current 35-per-cent level and result in ownership in the mid-40 per cent range,” Mr. Bolland wrote to clients.
“At that ownership level, we reasoned that Scotiabank would have gained control of CI Financial without paying for the full company. In our view, at near 50 per cent ownership it would be difficult for CI Financial shareholders to vote against many material resolutions put for by Scotiabank.”
But in recent conversations with CI managers, “we believe management would be willing to sacrifice this change in governance for the ability to jump start their organic growth and gain access to Scotiabank’s mutual fund platform and distribution network (branches). If CI shareholders accepted this arrangement, we believe management would be on board,” Mr. Bolland added.
The alternative is for Scotiabank to buy the remaining 65 per cent of CI Financial (with a 20 per cent premium), and that cost would be about $4.5-billion, he suggested.
Scotiabank’s filing of a shelf prospectus for debt securities raises speculation that a deal to buy the rest of CI is in the works, he said. “We attribute a low probability that this will occur in the short term.”
Mr. Boland said that CI remains his “top pick” among asset managers with a one-year target of $23.50. With a possible arrangement with Scotiabank for its fund business, “we believe shareholders are receiving a free option on superior organic growth at this time,” he said.
