AGF shares jump on U.K. merger talks

Shares of Canadian fund manager AGF Management Ltd. soared Monday amid merger talks on the other side of the Atlantic.

AGF confirmed Monday that London-based Smith & Williamson, a private wealth-management firm of which AGF owns 33.6 per cent, is in “exclusive discussions” with Tilney Group Ltd. about a possible merger that would create one of Britain’s largest wealth managers with £45-billion ($66-million) in assets.

Investors drove AGF’s share price to an 18.9-per-cent gain as analysts said the news of a potential deal “makes sense.”

Tilney, a financial-planning and investment-management group also based in London, manages approximately £24-billion in assets with more than 300 financial planners and investment managers. The company also provides digital advice through its online platform Bestinvest.

“While these discussions are ongoing, there can be no certainty these will lead to a transaction,” AGF said in response to media reports in Britain about a potential change to its investment in Smith & Williamson.

AGF declined to comment further when contacted by The Globe and Mail.

AGF first acquired an interest in Smith & Williamson in 2002, when the British financial-services firm merged with AGF’s subsidiary NCL (Securities) Ltd.

Smith & Williamson manages £21.4-billion in assets and focuses on high-net-worth and institutional clients. Recently, the firm’s board has been in discussions to launch an IPO as early as 2020.

But while a climbing share price reflects the potential for an early monetization of AGF’s stake in Smith & Williamson, the market still is not giving AGF enough credit for its British affiliate, said John Aiken, an analyst with Barclays Capital Inc.

“This is particularly surprising given Smith & Williamson’s plan for an IPO next year, and the recently confirmed talks of an outright sale," Mr. Aiken added in a research note on Monday.

He said AGF’s opening Monday price of $5.10 was a 61-per-cent discount to the midpoint of his estimates of the worth of the shares. In that scenario, Mr. Aiken assumes AGF’s stake in Smith & Williamson is worth just less than $275-million, or about $3.50 a share.

Similarly, CIBC World Markets analyst Paul Holden agrees that the current share price is not adequately capturing potential proceeds for AGF, which he predicts "would be predominately used to repurchase stock, reduce financial leverage and co-invest in infrastructure assets.”

Mr. Holden says he believes AGF could realize $1 to about $1.50 more per share for its AGF stake than the $1.55-per-share value that is reflected on the company’s balance sheet. He boosted his target price for AGF to $7.50 from $6 on the news.

The discussion between the two British firms comes two years after Smith & Williamson were in similar “exclusive” discussions with London-based Rathbone Brothers – a deal that eventually fell through when both firms were unable to come to an agreement that was in the best interests of shareholders.

Tilney approached Smith & Williamson in 2017 with a counteroffer that was dismissed.

During that time, AGF’s CEO Blake Goldring said he would “actively pursue alternatives to realize value in its investment.”

Desjardins Securities analyst Gary Ho says the potential valuation could be above $267-million, and he would “not be surprised” to see other potential bidders emerge from Monday’s news as “there are limited sizable private wealth managers in the U.K."