A sale of high-net-worth management company Richardson GMP could generate in excess of half-a-billion dollars, with a handful of firms likely interested in bidding.
According to an in-depth report penned by Scotia Capital Inc. analyst Sumit Malhotra, the front-runners are Raymond James Canada, National Bank of Canada and Industrial Alliance, with a number of dark-horse candidates possibly joining the bidding as well.
RGMP is the second-largest non-bank-owned wealth manager in Canada, with $26.3-billion in assets under administration (AUA) as of Feb. 29. (Raymond James Canada is the largest with $26.9-billion.) The firm was established in 2009, when independent broker dealer GMP Capital Inc. fused its wealth-management arm with long-time wealth manager Richardson Partners Financial. Under the current ownership structure, GMP and Richardson Partners each own 30 per cent, with the financial adviser network owning the remaining 40 per cent – an unusual arrangement that has helped keep employee retention levels high.
This November, a so-called liquidity mechanism kicks in that will allow any of the three major shareholders to put the wealth manager in play. Under the arrangement, GMP will be given the first option to buy out the others. But the most likely scenario, according to Mr. Malhotra, is that a third party will buy the asset.
"We believe a sale to a third party would represent the best value-creation scenario for the partnership group (GMP, Richardson Family, investment advisers), though it should be noted that the partners could simply opt to keep the current ownership structure."
When the deal was initially struck, the notion that GMP would eventually acquire the Richardson Partners share seemed possible. Over the past number of years, as GMP's prospects have deteriorated, its ability to come up with the necessary funds became unlikely – or, as Mr. Malhotra put it, "the numbers do not work for GMP."
Despite its significant value – a number Mr. Malhotra pegs at $527-million, or roughly 2 per cent of assets – RGMP hasn't been a particularly profitable venture.
"Richardson GMP has contributed an average of $220,000 in earnings per quarter over the past two years for GMP. The low level is largely due to the heavy expense structure of the business," Mr. Malhotra said.
Where RGMP distinguishes itself is in the size of its average book. At $137-million per adviser, it ranks the second highest of any wealth-management company in Canada. Only RBC Dominion Securities, with $165-million per adviser, has a higher standing.
An influx of cash would give GMP a big capital buffer during a difficult time for the industry. It currently has about $150-million in working capital. A sale of RGMP could more than double that.
As to what GMP might do with the cash? On Thursday, in a conference call with analysts following the release of its first-quarter earnings, chief executive officer Harris Fricker was asked what he would do if the firm's capital position was materially stronger.
"Return of capital [to shareholders] would be No. 1 on the list," he said.
Among the possibilities he mentioned: reinstating the dividend, paying a special dividend or a share buyback.
Here are the most likely buyers, according to Mr. Malhotra:
Raymond James Canada
"Raymond James Canada would appear to have the strongest strategic fit with Richardson GMP," according to Mr. Malhotra. "Both are Canadian broker-dealers which engage in retail distribution and investment banking. Both have large networks of IIROC advisers capable of customizing investment solutions and are not restricted to selling certain types of mutual funds."
A deal between RGMP and Raymond James would see it double its AUA, which would firmly entrench it as the largest independent retail broker in the country.
National Bank of Canada
Mr. Malhotra notes that National Bank of Canada has been building its adviser network and that CEO Louis Vachon has been vocal about the need to broaden its retail distribution network.
"One limiting factor for [National Bank] may be its regulatory capital position, which has consistently trended at the low end of the banking sector."
Canadian Imperial Bank of Commerce
"Management has made repeated reference to wealth management as the primary focal point for growth at the bank, though since taking over in September, 2014, CEO [Victor] Dodig has been more specific in targeting private banking or high-net-worth capabilities in the U.S.," Mr. Malhotra said.
"CEO [Yvon] Charest has publicly stated that Industrial Alliance would be willing to spend 'up to $500-million' on an acquisition, with distribution capabilities in the wealth-management space one of the key areas of emphasis."
Mr. Malhotra writes that mutual fund companies CI Financial Corp. and IGM Financial Inc. have the financial wherewithal to buy RGMP, but he ultimately views a deal by either as unlikely.
"Given the mismatch between the two adviser bases – both CI and IGM are more heavily reliant on MFDA advisers that sell mutual funds as opposed to Richardson GMP's IIROC adviser base."