Bank of Nova Scotia (NYSE:BNS) is involved in a stutter step style, maybe-it's-going-to-be-a-takeover deal.
Dundee Wealth [TSX:DW] ran into some
trouble with its wholly owned bank as a result of asset securitization
that blew up in its face. They needed help. Bank of Nova Scotia steps
in and buys out the problem child bank and also buys approximately 20%
of Dundee. Not what Ned Goodman had in mind, but there was a problem.
The rationale for BNS is excellent. The problem child is small enough and BNS is big enough to allow BNS to hold their nose and gulp the problem down with minimal gag reflex complications. The sugar that made the deal go down was the equity stake in Dundee. BNS is way behind its other rivals in mutual funds, financial advisers and wealth management.
Therefore a foothold into Dundee makes all the strategic sense in the world. Except to potential competitors, some of whom very much appreciated the fact that BNS was a weak participant in the field.
Enter CI. CI is a corporation controlled by CI Financial Income Fund, an income trust listed on the Toronto Stock Exchange under the symbol CIX.UN. The CI Financial group of companies had approximately $95.4 billion in fee-earning assets as of Aug 31, 2007.
CI offers a 52% premium. At first the deal was structured with BNS going away. After discussions between Dundee and CI it became apparent that Dundee was contractually obliged to sell the problem bank. This also means that BNS is contractually obliged to buy the problem bank.
CI amends the offer and now has decided that BNS participation is really a very good thing. You can follow the wisdom. CI has just positively established the market valuation for itself by buying a major competitor at a 52% premium. BNS cannot leverage a third party difficulty and reduce shareholder wealth at CI. BNS which has had a reputation of being slow, must now pay a huge premium if it wants more of Dundee or pray tell CI.
BNS incorrectly focused on deal points hoping to capitalize on a problem situation. They did not look around to survey the potential motivations of other market players. BNS cannot steal the asset.
Sometimes you just have to stop and watch a good fist fight.