Bill Holland, CEO of CI FinancialSIMON HAYTER/The Globe and Mail
Instead of adopting a wait-and-see approach, CI Financial's investors started running for the exits first thing Thursday morning.
Right after the markets opened, CI's stock slumped nearly 6 per cent as investors rushed to judgment on the news that Bank of Nova Scotia is looking to "monetize" its 37 per cent stake in the asset manager.
Although Scotiabank stressed that it hasn't decided whether it will sell its stake to strategic buyers or unload shares through public stock offerings, investors seemed to think they latter was the most likely option.
They had good reason to think this way. CI chairman Bill Holland told The Globe and Mail his initial impression upon hearing the news last week was that Scotiabank wanted to launch a bought deal for at least $1-billion to start selling off its stake.
Bay Street analysts also started to weigh in, noting that there just don't seem to be many strategic buyers, such as other Canadian banks or global asset managers, who would likely be willing to write such big cheques for a stake in an already-expensive asset manager. CI trades at a price to earnings ratio of 21.97.
If a negotiated sale is off the table, Scotiabank's best option is to sell the shares through a bought deal. If the bank goes this route, the expectation is that the deal would have to get done at a huge discount to its existing market price.
Not only are bigger deals usually priced at bigger discounts in order to appear more palatable to investors, but there is at least one comparable recent transaction that looms large.
In 2009 ING Group announced it would unload at least $1.75-billion worth of stock in its Canadian insurance subsidiary, which later became Intact Financial. The bought deal was priced in two chunks – a public portion done at a 22 per cent discount, and a private placement priced at a 26 per cent discount.
Even though the ING deal came in the heat of the financial crisis, so the discounts might not be totally applicable, they surely linger in investors' minds. Plus, CI has traded an average of 315,000 shares per day in 2014, meaning anyone who buys into such a massive offering may not have much liquidity for their positions. Facing this constraint, Scotiabank may have to lure them in with a big discount.
By mid-day, however, investors seemed to be freaking out at least a little less, with CI's shares gaining back some ground, leaving it down only 4 per cent on the day. It could just be that investors feel they overreacted at first, or some could be realizing that Scotiabank will do everything it can to avoid a bought deal – and that could be why they hired Goldman Sachs & Co. to help them evaluate their options, leaning on a global investment bank to scour the world for any possible strategic buyers.
(P.S. Yes, we know we're overloading you were with Scotiabank/CI news. We just can't help ourselves.)
Tim Kiladze