National Bank knew Natcan needed more scale

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The key message in National Bank of Canada's decision to sell its Quebec-based asset management arm to Fiera Sceptre Inc. is one of scale.

With $25-billion in assets under management, Natcan Investment Management was by no means hurting, but it also wasn't big enough to thrive -- not in an industry that is rapidly consolidating. By combining with Fiera Sceptre in a $310-million deal, the merged company will have $54-million assets, making it the third-largest publicly traded asset management firm.

National Bank chief executive officer Louis Vachon made it clear on a conference call that he saw this need for scale a long way out, and for that reason Fiera Sceptre and National had been in talks for over a year.

He also noted that there are big distinctions within asset management between the wholesale money management arm, and retail wealth management. When it comes to the latter, National is all in, having bought Wellington West Capital Markets and the Canadian retail brokerage arm of HSBC last year. And in this arena, National wants to own 100 per cent of the equity.

But on the wholesale side, manufacturing and distribution are quickly consolidating and National was forced to think ahead. "It's not a strategic retreat at all," Mr. Vachon said. "We just feel that we'd rather own 35% to 40% of [a $54-billion entity]that can be used successfully for consolidating the industry in Canada, than owning 100% of a [$25-billion] internal manufacturer."

National Bank "has come to the conclusion that the financial services industry in Canada is a scale business and its management team holds no affinity for, nor fidelity towards, sub-scale operations," noted analyst Peter Routledge. "We suspect that National's management team concluded that the bank could not grow its wealth management manufacturing arm, Natcan, to adequate scale via acquisition; perhaps as a consequence of the capital intensity of this approach under Basel III."

That being said, there are obvious problems with holding a minority stake, and you need to look no further than the tension between Scotia and CI Financial for proof.

As for Fiera Sceptre, the Globe's Shirley Won points out that a deal will give the company enough heft to expand south of the border.

The takeover's $310-million price tag is split in two. $150-million will be paid in shares and $85-million will be paid in cash at closing. The remaining $74.5 million will be paid over time, subject to certain minimum assets under management thresholds. In other words, National has to keep its assets under the Fiera Sceptre fold, or lose money. Mr. Vachon said he has every incentive to do that, because by receiving stock National becomes Fiera Sceptre's largest shareholder.

Still, the price tag is quite cheap at 1.26 per cent of Natcan's assets under management. Mr. Vachon said this value was agreed upon because the rate for which Natcan had been paid to manage National Bank mutual funds was "probably somewhat below market," and that pricing structure will remain with Fiera Sceptre.