Board changes signal end game at Canaccord Genuity

In rough terms, there’s $500-million up for grabs in the fight for investment bank Canaccord Genuity Group CF-T.

On Monday, we found out who stands to win that half-billion-dollar prize. It will likely be claimed by Canaccord’s executives, who are attempting to take the dealer private for $1.1-billion.

The losers are the company’s shareholders, whose best hope for a sweeter takeover offer vanished over the weekend, when Canaccord’s four-member special committee and a fifth independent director resigned. The most dramatic act any board member can contemplate is quitting. To have five directors exit during a takeover is a sign of serious dissention.

In a press release, Canaccord said its board members – most of whom are experienced capital market executives – resigned because they could no longer satisfy their fiduciary duties to shareholders, and “the breakdown with management and others through the course of the bid was irreparable.”

There’s now a clear path for Canaccord management – led by chair David Kassie and chief executive officer Dan Daviau – to acquire the dealer in a leveraged buyout, sell off wealth management divisions for $1-billion-plus to pay down debt, and put around $500-million in their wallets over the next few years.

In addition to all four members of Canaccord’s special committee, director Francesca Shaw, head of the audit committee, resigned over the weekend. An accountant by training, Ms. Shaw previously held executive roles at Canadian Imperial Bank of Commerce and Toronto-Dominion Bank over a 30-year banking career.

In the wake of the departures, Canaccord appointed a new, two-member committee to represent shareholders in the takeover battle. One of the members, Terrence Lyons, was endorsed for the role last week by Skky Capital Corp. Ltd. The Bermuda-based fund manager owns 8.8 per cent of Canaccord and has pledged its support to the management bid.

In a telling move, Canaccord’s new special committee switched law firms over the weekend. Davies Ward Phillips & Vineberg LLP is out. In its place, the new committee hired Norton Rose Fulbright Canada LLP. No one parts ways with their law firm because they liked the advice they were getting.

The opportunity to make serious money taking Canaccord private exists because the investment bank’s stock price tends to track market sentiment, as opposed to the company’s profit. As recently as 18 months ago, when interest rates were low, the economy was hot and initial public offerings were daily occurrences, Canaccord’s stock traded at $16.

By last August, when rates were soaring, the economy was stalling and Bay Street was seized by one of its predictable “OMG-there-will-never-be-another-IPO” funks, Canaccord’s stock was around $8.

That’s when Mr. Daviau – tired of trying to convince investors that Canaccord deserved a premium valuation after years of building a fee-generating wealth management platform – began discussing taking the company private with Skky, its largest outside shareholder.

In a regulatory filing, Canaccord management disclosed that last summer the company also considered selling its British wealth management business. The board decided not to move forward on concerns the stock price would drop. As a private company, those issues vanish.

Here’s how the numbers look for Canaccord’s management, who already own 21 per cent of the company. The executives are offering $11.25 a share, which values the business at $1.1-billion.

Skky is committed to supporting the bid, even though its CEO, Gordon Flatt, said the dealer was worth $15 a share in a letter to the special committee. That means he estimates Canaccord is worth $1.5-billion, or $400-million more than what management is offering.

Canaccord’s now-departed committee hired RBC Capital Markets as its financial adviser. RBC concluded the stock is worth between $12.75 and $15.75 a share, or a top-end estimate of $1.6-billion for the entire company. To support its work, RBC said Canaccord’s British wealth management business is worth up to $750-million as a stand-alone business. RBC valued the Canadian wealth division at $900-million and Canaccord’s Australian business at $175-million.

Canaccord management is poised to take their company private at a time when investors are steering clear of all things financial. When sentiment changes, and it will, the executive can sell Canaccord’s wealth management businesses, pay the debt used to finance their takeover and pocket serious cash, while still owning a banking business worth at least $500-million. And the committee trying to win a better deal for shareholders resigned on the weekend.