In one swift move, the entire wealth management industry in Canada was transformed. Sun Life has agreed to sell its 37% stake in CI Financial Income Fund to Scotiabank.
The sale made Scotiabank a big player in wealth management overnight and will likely give CI the distribution network it has long yearned to compete with bank-owned fund giants RBC and TD.
Scotiabank will purchase CI units at $22.00 per share, representing a 32% premium to the last closing share price. In total, the transaction will bring Sun Life approximately $2.3 billion.
The synergies between CI and Scotiabank are obvious. Scotiabank has identified wealth management as one of its biggest growth areas, long lagging behind other large banks in the industry. It lacked the strong fund management staff of other banks.
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Peter Loach, an independent investment fund analyst, notes that Scotiabank will immediately remedy this problem by taking a stake in CI. Loach says that while Scotia has improved its fund offerings, including luring three star managers from RBC – John Varao, Shane Jones and John Kellett – in April 2007, CI’s more than 800 fund offerings are superior in both quality and scope .
While the purchase does not represent an outright takeover of the company, it is expected that the CI family of funds will play a significant role on the Scotia advisor platform. In doing so, Loach argues, it likely solves CI’s biggest problem as the largest independent mutual fund producer in the country – distribution.
Loach says CI is one of the top two fund companies in Canada for quality of managers and breadth of products, the other being a dynamic company. Larger competitors are beating them out because of the sheer number of advisors banks and Investors Group use.
Indeed, in August there were rumors that CI was going to take over Scottish mutual funds in exchange for CI units. This agreement did not come to fruition. Ironically, the main obstacle was Sun Life’s disapproval.
“Distribution is the most important issue,” says Loach. “CI needs distribution.”
Interestingly, this transaction allows Scotiabank to become a consolidator of both CI and Dynamic if enough shares ever come up for sale. Similar to the purchase of the 18% interest in Dynamic’s parent company, DundeeWealth, Scotiabank has made arrangements to acquire additional CI securities if they become available and if Scotia wishes to purchase them.
If that were to happen, Scotiabank would leapfrog from an underperforming national wealth management player to arguably Canada’s most prolific fund provider.
“This announcement represents a significant step forward and demonstrates Scotiabank’s continued commitment to growing our wealth management business,” says Rick Waugh, president and CEO of Scotiabank. “We have seen significant growth in our wealth management products and services. With this agreement, we gain a significant share of one of the leaders in the wealth management market in Canada with a long history of excellent performance.”
What’s a bit more perplexing is why Sun Life decided to sell. CI has been a highly valuable asset to Sun Life, serving as a de facto subsidiary of the fund, which partners with the insurer for its lucrative SunWise line of segregated funds – which includes the hugely popular SunWise Elite Plus guaranteed minimum distribution product.
At first glance, analysts thought perhaps Sun Life’s balance sheet was in trouble, but the company’s CEO, Donald A. Stewart, rejected that suggestion, saying the proceeds from the sale of CI would most likely be used for bargain hunting in the distressed financial securities sector . The company did not specify what it wanted to bid for.
“Sun Life is well-positioned to capitalize on the unprecedented opportunities that currently exist in the global financial services industry. Unlocking the value of CI now provides Sun Life with increased firepower to aggressively pursue our growth goals,” he says.
However, the loss of CI does not mean that Sun Life has withdrawn from the asset management business. The insurer says it remains fully committed to growing its asset management business through Sun Life Global Investments.
Sun Life also insists that it will continue to act in partnership with CI on ring-fenced funds.
“We continue to work with CI on product and distribution,” says Steve Kee, assistant vice president of communications at Sun Life.
While it may not be exactly the kind of deal that was rumored in August, CI Financial President and CEO William Holland is nonetheless welcoming his company’s largest new shareholder.
“This announcement is good news for both Scotiabank and CI Financial and is a strong demonstration of confidence in our company,” he says. “CI Financial has a long-standing relationship with Scotiabank, and this investment reflects Scotiabank’s confidence in both our business today and our long-term potential.”
In fact, Holland said in an interview with Advisor.ca that CI has already negotiated a deal to offer white label banking services from Scotiabank to its advisory firms, such as Assante.
Asked if he was concerned that Assante’s advisers might have problems with the Big Five bank, Holland pointed to white label services as a reason why Assante’s advisers are likely to be positive about the deal.
“This should help us provide the very good banking products that high-end financial services professionals like those who work with Assante need,” he says.
As for the second distribution network – Scottish advisors – Holland says there are currently no plans for partnerships or exclusive deals.
“We have no idea what the relationship with the bank will be like in terms of distribution. I didn’t have a chance to talk to them,” he says.
Holland says companies operating in today’s market need to create as large and diverse a distribution network as possible.
Posted by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com
(10/06/08)
