AGF Management Ltd. scored a bigger-than-expected $320-million payday from the planned merger of two large British money managers, leading analysts to shift their views on a Toronto-based investment company that had been in a long slide.
Asset manager Smith & Williamson Holdings Ltd., which is 33.6-per-cent owned by AGF, said early Thursday that it will join forces with rival Tilney Group Ltd. in a transaction that will create one of Britain’s largest independent wealth managers, with £45-billion (about $75-billion) in assets.
The proceeds of the deal, which include $277-million in cash and a 2.3-per-cent stake in the merged company, are significant for an entity the size of AGF, which has a market capitalization of just $500-million, after a long stretch in which it has lost clients and assets.
AGF’s share price rose 6 per cent on Thursday to $6.15 and is up 35 per cent since mid-August, when Smith & Williamson confirmed that it was in merger talks. Analysts previously estimated AGF would receive approximately $240-million for its stake.
The company’s decision to sell the bulk of its stake in Smith & Williamson, more than 20 years after it first entered Britain, reflects the rising cost of doing business in that country because of regulatory changes that include significant government pension changes unveiled in 2015, said AGF executive chairman Blake Goldring. He said the political uncertainty surrounding Brexit played no role in the move, as AGF began looking for an exit before the referendum on leaving the European Union in 2016.
“The U.K. is an attractive market for fund managers, it’s one of the world’s largest economies, but it does require scale,” said Mr. Goldring. Because of concerns over Brexit-based currency moves, AGF hedged the cash portion of the proceeds from the deal to protect against any decline in the value of the British pound between now and the close of the transaction, which is expected by March, 2020.
AGF has $37.4-billion of assets under management, with a stable of products that includes mutual funds sold through financial advisers and funds targeted at institutional investors. Like many independent wealth managers, AGF struggled in recent years to retain market share in the face of competition from larger rivals, such as the banks, and lower-cost alternatives such as exchange-traded funds.
AGF chief executive officer Kevin McCreadie said in a news release: “The return on our investment gives us the flexibility to redeploy capital in a number of ways, including funding future share buybacks, servicing debt repayment and continuing to invest in new areas of growth.”
In a research report, analyst Paul Holden at CIBC World Markets Inc. said, “We see the potential for AGF to execute on other value-surfacing transactions.” Mr. Holden raised his target price on AGF shares to $8 from $7.50.
He said the company’s mutual-fund sales are showing “material improvement” and AGF is diversifying its sources of growth and earnings by building out an alternative-assets business. In the past, AGF has found buyers willing to pay a premium for businesses it is selling, including the $415-million sale of its trust unit to Laurentian Bank in 2012.
“We’re focused on offering investment strategies that are clearly differentiated,” Mr. Goldring said. In the past five years, AGF has launched an alternative-asset management unit that focuses on infrastructure, which now has $2.4-billion in assets, and an ETFs division that manages $1.1-billion.
The tie-up with Tilney is Smith & Williamson’s second attempt to strike a merger in as many years. In 2017, the company disclosed that it was in talks with London-based Rathbone Brothers, but the two were unable to agree on terms of a transaction. When the deal died, Mr. Goldring said Smith & Williamson began working on an initial public offering while also starting talks with Tilney which culminated in a merger.
Tilney is a 183-year-old company and is emerging as a consolidator in the relatively fragmented British wealth-management industry. British private equity fund Permira purchased Tilney five years ago − the company was previously controlled by Deutsche Bank − and introduced a strategy of expanding through mergers and acquisitions. Smith & Williamson was founded in Glasgow in 1881.
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