Saturday, September 29, 2007

Scotiabank to Buy Dundee Bank, Stake in DundeeWealth

The Globe and Mail, Tara Perkins, 29 September 2007

Bank of Nova Scotia successfully closed its acquisition of 18 per cent of DundeeWealth Inc. yesterday, a deal that was only made possible by happenstance.

DundeeWealth, with its 600 full-fledged brokers and 1,200 advisers who can sell mutual funds, is described by Blackmont Capital analyst Brad Smith as one of Canada's "premier wealth management platforms."

Mr. Smith recently pointed out in a note to clients that DundeeWealth's mutual fund assets have grown at a compound annual rate of 21 per cent over the past two years, compared with a combined rate of 17 per cent for similar assets at the six biggest banks in Canada.

More than half of DundeeWealth is owned by the Goodman family's holding company. Their controlling stake gives them a veto over any transaction, and they've said time and time again that they don't want to part with their wealth management business.

But fate turned against them this summer when turmoil erupted in the credit markets.

About one year ago, they had created Dundee Bank, which attempted to lure customers with high interest rates on its savings accounts. That meant that the bank had to invest its deposit base in something with an even higher return, to profit from the spread. Dundee Bank put much of its money in areas such as non-bank-sponsored asset-backed commercial paper and collateralized loan obligations, which fell into trouble as liquidity dried up in August.

DundeeWealth was forced to buy up some of those assets to keep the bank's balance sheet in shape, and it had to take on extra debt.

The situation created an opening for Bank of Nova Scotia, whose chief executive officer, Rick Waugh, had been coveting DundeeWealth for some time.

Scotiabank agreed to fork over $260-million for the unprofitable Dundee Bank in order to be allowed to buy 18 per cent of DundeeWealth for $348-million.

The agreement also gives Scotiabank a right of first refusal if the Goodman family ever decides to sell its stake.

Scotiabank is not the only one that wants DundeeWealth. Mutual fund giant CI Financial has already tossed in a bid that far exceeds Scotiabank's on a per-share basis. Shortly after the Goodmans rejected it, CI's CEO, Bill Holland, removed some of his offer's conditions in an attempt to make it more palatable. His offer is still on the table, despite the deal with Scotiabank.

Others are also sniffing around.

Some observers speculate that minority shareholders will resort to lawsuits if necessary in order to realize the potential gains from CI's bid.

Manulife's head of wealth management, Roy Firth, describes the saga as a soap opera. "I don't think the story's at an end yet, let's put it that way, but it's an interesting one to watch," he said.

"We obviously have made acquisitions in the past, and while we have nothing on the planning table at this point in time, it's certainly something we monitor and certainly don't exclude the possibility of acquisitions in the future," he added.

If the Goodmans were to open the process to a full-fledged bidding battle, both Manulife and CI are seen as top contenders because of how closely their operations resemble Dundee's.

But if determination counts for anything, then a winning Scotiabank bid cannot be ruled out.
The Globe and Mail, Derek DeCloet, 27 September 2007

Well, this is quite a box he's got himself into now, isn't it? No, not Ned Goodman: We're talking about his new pal, Rick Waugh.

Last week, the Bank of Nova Scotia boss looked like Bay Street's new master of the deal. First, he gave a big loan to help DundeeWealth, the Goodman-controlled financial services group, out of a tight spot. Then he used that position to buy 18 per cent of that business, at a very reasonable price, and negotiated first dibs on the other 82 per cent to boot. Such a clever lad, Rick Waugh. Who says Winnipeg produces nothing but hockey players and frostbite?

But it's all part of the plan. Scotiabank's Achilles heel is money management, a great business opportunity that it has largely squandered. Of the Big Five banks, it's dead last in mutual fund assets, with $18-billion (Bank of Montreal, the next-smallest, has $38-billion). It employs 30 per cent fewer investment advisers than the brokerage arms of either Royal Bank or BMO. Scotiabank is so far behind, it needs binoculars to see the competition's backside.

This is the kind of problem that bankers don't usually like to talk about. On second thought, maybe they do. Here's Mr. Waugh in 2004: "We will find new ways to grow in wealth management." In 2005: "We are making wealth management a top priority." After the annual meeting in 2006: "It's very important for us to grow in wealth management, and particularly here in Canada." The man has staked a lot of his credibility as CEO on solving this.

Trouble is, there's virtually nothing to buy. Of the Canadian fund companies with at least $15-billion in assets, every one is owned by a big bank, a big foreign company, or the employees, with two exceptions: DundeeWealth, and AGF Management, each run and controlled by the founding family, neither willing to sell.

This summer, fate gave Mr. Waugh his chance when Dundee got caught in the credit squeeze. The result was a nice, clubby little deal that gave Scotiabank a toehold in one of the fund industry's fast growers. Over the past five years, while Scotia was adding $5-billion in mutual fund assets, Dundee grew by about $15-billion (more on that in a moment).

Then Bill Holland of CI Financial had to go and ruin everything, lobbing a bid for the whole company at a huge premium to the market and to what Scotiabank paid. There are only two possible outcomes now: (1) the Goodman family refuses to sell at any price or (2) Dundee will start a full-blown auction that will see Mr. Waugh bidding against CI, Manulife Financial and God-only-knows who else. Let's consider these one at a time.

In scenario one, Mr. Waugh gets his 18 per cent, but with little chance of getting the big prize - control - in the future. Ned Goodman will turn 70 in November. If he isn't going to sell the business now, that implies the decision will be left to his son, David Goodman - who, by the way, is 43 years old and has been the CEO of DundeeWealth for exactly 99 days. Do you really think he'll be anxious to sell? The Americans might get a man to Mars first.

In scenario two - the auction - Mr. Waugh has the upper hand. The minority stake, and the right to match any offer, are powerful advantages. But they are offset by a couple of factors. Scotiabank trades at 12 times earnings; CI's bid, $2.36-billion, values DundeeWealth at about 30 times profit. Matching it would require the bank to deplete its excess capital.

Ian de Verteuil, the sharp-eyed bank analyst at BMO, figures that at that price, Scotiabank could still make the deal and not hurt its per-share earnings, if it cut $75-million in costs. It could surely do that, as there's overhead to chop; David and Ned Goodman together received $5-million in salary and bonuses last year. But what then? The big reason Dundee has grown so fast is that it was early to spot some investing trends (real estate, income trusts, natural resources). Part of the credit, surely, belongs to Ned Goodman and his intuition for the market. Removing him would hurt the business. And what about Dundee's star money managers - would they work for a bank?

You can see Mr. Waugh's predicament if this goes to a bidding war. If he wins, he will be paying full price - certainly more than CI's proposed $2.36-billion - for a business that would not be quite the same once he owns it. But if he loses, he's blown a chance to fulfill his promise to get serious about wealth management. Scotiabank has done some of its best deals buying broken or temporarily distressed assets, such as Montreal Trust or Mexico's Inverlat. Mr. Waugh thought he had done it again with Dundee, until Bill Holland got in the way.
The Globe and Mail, Shirley WOn & Tara Perkins, 27 September 2007

CI Financial Income Fund yesterday revised the terms of its $2.36-million hostile bid for DundeeWealth Inc., fuelling speculation about an imminent takeover battle for the financial services company.

The mutual fund giant is still offering $20.25 per share for DundeeWealth, but dropped a condition that it scuttle its $348-million deal to sell its bank unit and an 18-per-cent stake in the firm to Bank of Nova Scotia.

"The CI bid is an opening bid - not the winning bid," said Ron Mayers, a vice-chairman of Desjardins Securities who specializes in arbitrage trading and bought DundeeWealth shares this week. "I wouldn't own it if I thought I was going to lose money," Mr. Mayers said in an interview. "DundeeWealth could go for $25 or $26."

Shares of DundeeWealth, which owns Dynamic Mutual Funds, surged 8 per cent yesterday to close at $18.30 on the Toronto Stock Exchange with 4.8 million shares changing hands. That's on top of a 28-per-cent price jump on Tuesday.

"This is an ongoing soap opera," said Westwind Partners analyst Horst Hueniken. "The market is saying that the odds of a transaction have gone up.... Beyond that, it's all speculation."

Analysts have suggested that other potential bidders could be Scotiabank, which has the right of first refusal through its deal with DundeeWealth, or other financial players like IGM Financial Inc. - which owns Investors Group Inc. and Mackenzie Financial Corp. - or Manulife Financial Corp.

CI chief executive officer Bill Holland said he is "optimistic" about a possible deal with his new offer that would cost $3.2-billion when including the additional shares that Scotiabank will hold in DundeeWealth.

Toronto-based DundeeWealth also has 1,800 advisers in its financial planning and mutual fund dealer arms. "It recognizes the value that they have built over the last 20 years," Mr. Holland said.

Any takeover depends on Ned Goodman and his family - who control a 56-per-cent stake in DundeeWealth through parent company Dundee Corp. - putting the company up for sale. And David Goodman, CEO of DundeeWealth, recently told The Globe and Mail that "we're not sellers."

The unsolicited offer by CI is 52 per cent above the closing price of DundeeWealth on Monday. Under a private placement, Scotiabank is buying its minority stake in DundeeWealth for $12.76 a share. The Scotiabank transaction is set to close this week.

While the Goodman family - who control Dundee through a dual-class voting structure - may have the law on their side in not budging on a sale, "the optics are terrible for them," argued Mr. Mayers.

"At some point, the premium becomes so high that someone could make a case for shareholder oppression."

Toronto-based CI rushed to change the conditions of its offer after Dundee on Tuesday rejected the "terms and conditions" of CI's surprise bid, but did not appear to rebuff the offer outright. The move came after Mr. Holland had a conversation with Ned Goodman. "He did not tell me what the conditions were," he said. "So I looked through the logical conditions and eliminated them."

CI's offer also requires the recommendation of the six-person DundeeWealth board, which includes four independent members. "If the board is supportive, that could place more pressure on the parent company and its willingness to sell," said CIBC World Markets analyst Stephen Boland.

DundeeWealth spokesman Robert Patillio would only say that it was just "business as usual" at DundeeWealth. "The only thing we are focused on at the moment is the completion of the Scotia arrangement," he said.

Scotiabank spokesman Frank Switzer would not comment on CI's new offer.

CI, which is 36 per cent owned by Sun Life Financial Inc., is Canada's third-largest fund company with $64-billion in assets. Like DundeeWealth, it also has financial planning and brokerage arms.
The Globe and Mail, Sinclair Stewart, Tara Perkins, Boyd Erman, 19 September 2007

Bank of Nova Scotia has long coveted Dundee Corp.'s vast network of investment advisers as a way to narrow the gap with its Big Five rivals, but could never find a way to persuade the controlling Goodman family to relinquish a stake in its brokerage.

That is, until credit markets seized up in mid-August.

Dundee's year-old banking business was dealt a blow by the crisis in the asset-backed commercial paper sector, forcing the company's asset management unit, DundeeWealth Inc., to orchestrate a bailout by taking on additional debt. Suddenly, Scotiabank had the catalyst it needed.

A telephone conversation between Scotiabank chief executive officer Rick Waugh and DundeeWealth CEO David Goodman on the last Saturday in August rekindled talks that had gone cool after a year of fruitless back-and-forth.

By Monday night, the companies had nailed down the terms of the deal that they announced yesterday: Scotia would buy Dundee Bank, an unprofitable business that sources said Scotiabank never really wanted, for $260-million as a quid pro quo for being allowed to purchase 18 per cent of DundeeWealth for $348-million or $12.76 a share.

Scotiabank also gets right of first refusal should more of DundeeWealth ever be for sale.

The acquisition is "very attractive from a strategic perspective" for Scotiabank, because the purchase aligns the bank with a highly regarded business in Dundee, analyst Brad Smith of Blackmont Capital said in a note to clients. "With three board seats and a right of first refusal on any future sale of the controlling interest, the acquisition positions [Scotiabank] to substantially expand its domestic wealth business should an opportunity present itself down the road."

Scotiabank's network of about 900 brokers has for years been dwarfed by those of Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce. Although the bank has identified wealth management as a priority, the brokerages available for sale in Canada tended to be either too small, or a poor cultural fit. A stake in Dundee, with about 600 full-fledged brokers and another 1,200 advisers who can sell mutual funds, provides the bank with a much bigger sales force.

In addition, Dundee's Dynamic mutual fund arm is the 12th-largest fund company in the country.

"The investment in DundeeWealth is a perfect strategic fit with Scotiabank's commitment to grow our wealth management business," Scotiabank spokesman Frank Switzer said.

For Dundee, the plan is now to focus on the wealth management business and potential expansion opportunities in the United States and Europe, without the distraction and expense of trying to right an unprofitable bank.

Dundee Bank was created to offer loans to people through investment advisers, providing an alternative to the big banks. But while its high interest rates attracted deposits quickly - the bank now has over $2-billion - the business lost money because it was difficult to find ways to invest those deposits at even higher returns. And what's more, the country's banking regulator demanded that increasing amounts of capital be set aside to cover the growing depositor base.

In search of those higher returns, the bank invested more than $380-million in asset-backed commercial paper, which tempted investors with better returns than other short-term investments, but which became frozen when the sector was gripped by a liquidity crisis.

The bank's sister company, DundeeWealth, agreed to buy the paper at par to get it off the bank's balance sheet, but that still promised to constrain Mr. Goodman's ability to follow through on plans for expanding the asset management side of the business. To make the purchase, Dundee had to increase its line of credit with long-time banker Scotiabank to $500-million.

The sale to Scotia "represents a very big opportunity for our company to get back to its money management roots and to get back to the business model that we understand," said Mr. Goodman, the son of Dundee founder Ned Goodman.

DundeeWealth shares, which had fallen by almost about a quarter since August, rebounded yesterday, and shares of Dundee Corp. also jumped.

The discussions, in which Dundee was counselled by GMP Securities, were exclusive, cutting out any other potential bidders.

But Mario Mendonca, an analyst with Genuity Capital Markets, said he believes Dundee is now in play, adding that its rising stock price suggests the market believes there are other bidders out there.

The end game for Scotiabank, ideally, would be a full takeover of the DundeeWealth business.

However, the Goodmans have never displayed a public interest in selling the company they built, and David Goodman said that's not about to change.

"We're not sellers," he said.
Financial Post, David Pett, 18 September 2007

Bank of Nova Scotia increased its domestic wealth management platform Tuesday, after agreeing to buy an 18% stake in DundeeWealth with a right to acquire 20% for $348-million. The "big six" bank also agreed to buy Dundee Bank for $260-million.

DundeeWealth stock jumped more than 8% following the news. Scotiabank shares, meanwhile were up only slightly in morning trading.

Blackmont analyst Brad Smith said the acquisition is a positive strategic fit for the bank, telling clients in a note "it aligns Bank of Nova Scotia with a highly regarded domestic wealth platform in Dundee."

He added that with three board seats and right of first refusal on any future sale of the controlling interest in DundeeWealth, Scotiabank is in a great position to expand its wealth interest, should it choose to go down that road in the future.

In the near term, Mr. Smith said he expects limited impact on Scotiabank's earnings per share and left his "buy" rating and $62 price target unchanged.
Bloomberg, Sean B. Pasternak, 18 September 2007

Bank of Nova Scotia, Canada's second-largest bank, will take an 18 percent stake in DundeeWealth Inc. and buy the firm's banking unit for C$608 million ($594.5 million) as it pushes deeper into asset management.

Scotiabank agreed to buy 27.3 million DundeeWealth shares for C$348 million, or C$12.76 a share, and buy Dundee Bank of Canada for C$260 million in cash, the Toronto-based bank said today in a statement.

Bank of Nova Scotia, which owns the smallest mutual-fund business of Canada's five largest banks, has said expanding its money management business is a priority. The bank hired three fund managers from Royal Bank of Canada and boosted sales through its branches, contributing to a 19 percent gain in asset-management revenue last quarter.

Wealth management firms are ``very attractive for their fee income,'' said Stephen Jarislowsky, chief executive officer of Montreal-based Jarislowsky Fraser Ltd., Scotiabank's third- biggest shareholder, according to Bloomberg data.

DundeeWealth manages almost C$63 billion in assets, and its Dynamic Mutual Funds unit is the eighth-biggest non-bank mutual fund seller in the country. Scotiabank will appoint as many as three directors to the DundeeWealth board, and has the right to increase its stake to 20 percent.

The acquisition is ``an important step in our continuing strong focus on wealth management,'' Scotiabank Chief Executive Officer Richard Waugh said in the statement. The transactions are scheduled to close this month, subject to regulatory approval.

Scotiabank's Scotia Securities unit had C$17.9 billion in mutual fund assets at the end of August, compared with C$19.8 billion at Dundee's Dynamic, according to the Investment Funds Institute of Canada.

Buying Dundee Bank of Canada allows Scotiabank to offer high-interest deposit accounts without ``mass cannibalization of its own deposit base,'' John Aiken, an analyst at Dundee Securities, wrote in a note to investors today. The bank may also be able to buy the rest of DundeeWealth if it were put up for sale, he said.

DundeeWealth is selling its bank less than a year after it was formed to offer savings accounts and other bank products through its investment adviser network. DundeeWealth said it will post a loss of about C$70 million from the sale of Dundee Bank because of a decline in some of its investments.

DundeeWealth said last month it reduced its holdings in asset-backed commercial paper by half, or about C$400 million, after the market seized up amid concerns over links to U.S. subprime mortgages.

While reducing the asset-backed commercial paper had ``something to do with'' selling the bank, DundeeWealth wants to focus on increasing its asset-management business, spokesman Robert Pattillo said.

Ned Goodman, chairman of DundeeWealth parent Dundee Corp. has had a ``personal relationship'' with Waugh, and previous Scotiabank CEOs Peter Godsoe and Cedric Ritchie, Patillo said.

GMP Securities advised Dundee on the sale.

Scotiabank shares rose 70 cents to C$52.65 at 4:10 p.m. on the Toronto Stock Exchange. DundeeWealth rose 90 cents, or 7.4 percent, to C$13.