Scotiabank makes huge takeover play

Scotiabank has struck a deal to buy the remaining equity in DundeeWealth, of which the bank already owns 18%.

The transaction will dramatically change the face of the mutual fund industry, where Scotia was something of a laggard among the big banks. Prior to the deal, Scotia was the tenth largest mutual fund asset manager, while Dundee was eighth. The combined assets under management will boost Scotia to fifth largest, with an AUM of $55.3 billion.

“The acquisition of DundeeWealth demonstrates our strong commitment to build our wealth management presence in Canada and aligns to our global wealth management strategy,” said Rick Waugh, president and CEO of Scotiabank. “We have enjoyed a long and very successful relationship with both Dundee Corporation and DundeeWealth and there is a clear strategic alignment between our businesses.

“Together we will provide clients, advisors and shareholders with even greater value. We also believe that Dynamic Funds, with their outstanding performance and breadth of products have excellent potential as we expand our global platform.”

Dundee is closely held by the Goodman family, with Ned Goodman as the controlling shareholder. Both he and his son, David Goodman, current president and CEO of the company, have irrevocably agreed to vote their Dundee Corporation shares in support of the transaction and will tender their DundeeWealth shares to the offer.

“We will be working very closely with David Goodman and the senior leadership to ensure that we have very strong retention,” said Chris Hodgson, group head, Scotiabank Global Wealth Management, on a conference call with analysts.

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“Ned Goodman will play a strategic role continuing as non-executive chairman of DundeeWealth and as a sub-advisor managing Dynamic’s Focus+ Resource Funds,” Waugh said. “David Goodman will remain DundeeWealth’s president and CEO and head the firm’s investment management activities together with their sales and distribution platforms. We look forward to combining the significant expertise and experience of these highly skilled leaders with our own.”

Dundee has been a darling of the independent distribution channel, which is sometimes wary about placing client assets in a bank-owned mutual fund company. Hodgson says he expects the relationship with independent advisors to remain strong, pointing to the success Scotia had in working with advisors after its acquisition of Dundee Bank, growing assets from $1.7 billion to $7 billion.

“I will be speaking with a lot of advisors today to ensure that they get a clear message that we’re going to support them and their businesses and practices,” Hodgson said. “It will be our plan to work through DundeeWealth to ensure that we promote the growth of the independent channel.”

Dinàmico?

“We plan to continue to use our Scotia Funds through the bank channel and we will be marketing the Dynamic Funds through the independent advisor channel,” said Hodgson. But the Dynamic name could expand well beyond the Canadian border.

“We see significant opportunities from a global perspective in creating global mandates. We’ll be working with David and his management team to create that.”

Scotiabank has a significant footprint in the Latin American and Caribbean markets, suggesting Dynamic Funds could be marketed in South American and the islands.

While the deal boosts Scotia to fifth place in the mutual fund market, it still holds an ace up its sleeve that could take it to the top spot. The bank holds a 37% stake in CI Investments, the third largest fund company in Canada. If it were able to buy CI outright, it would have an AUM of about $120.9 billion (based on current asset levels), eclipsing RBC’s $106.2 billion.

“We felt at this point in time that [the Dundee deal] was absolutely the best move for us,” Hodgson said. “But I will also say that we’re able to keep options open, and we have a very strong relationship with the CI group. Recently we directed some mandates toward them, based on their expertise, and we’ll continue to look for ways to build our investment.”

But don’t expect that transaction any time soon. Hodgson says the priority will be in integrating its Dundee acquisition.

The deal gives Scotia more than just a top-rated mutual fund manager, however. Hodgson told analysts that the bank had been looking at replacing its trading system, which would have involved an investment of $22 million. Today’s acquisition will allow the bank to adopt the robust Dundee platform.

The value of the offer to DundeeWealth shareholders is $21.00 per common share, representing an enterprise value for DundeeWealth of approximately $2.3 billion. Scotiabank will offer 0.2497 of a Scotiabank common share and, at the election of each shareholder, either $5.00 in cash or 0.2 of a $25.00, 3.70% five year rate reset Scotiabank preferred share for each DundeeWealth common share (including common shares issuable on conversion of other shares).

Waugh says the deal is expected to be accretive to Scotia’s earnings in the second year after the transaction.

(11/22/10)