Who Will Reap the Benefits of a CI Financial/Scotiabank Deal?

Speculation is running high that CI Financial Inc. (CIXUF.PK) is on the verge of acquiring Bank of Nova Scotia’s (BNS) mutual-fund business in exchange for a major equity stake. If a deal is forthcoming, CI, the third-largest investment fund company in Canada with $63-billion in mutual-fund assets, could legitimately rival IGM Financial Inc. and RBC Asset Management as the largest fund manager in the land.

The addition of Scotiabank’s 48 funds valued at C$22.1-billion would push total mutual-fund assets CI oversees to C$85-billion. Moreover, access to Scotiabank’s extensive distribution network would be a major windfall for CI. Too bad for CI the odds of the speculative deal closing are “very low,” according to BMO Capital Markets analysts Ian de Verteuil and John Reucassel, who left their price targets unaffected on CI (C$25), Scotiabank (C$52.50) as well as CI minority stakeholder Sun Life Financial Inc. (SLF) (C$43).

In a note to clients, they wrote:

CI would certainly benefit from owning and managing Scotia’s mutual-fund business. But a deal would likely be far less attractive for either Sun Life or Scotiabank.

Sun Life has about a 35% stake in CI. Any deal would likely result in a comparable share for Scotiabank — a very uncomfortable arrangement, the two BMO analysts said.

Sun Life would rightly view a [Scotia] deal as dilutive to their stake and intentions. Scotiabank would have to give up control of its mutual-fund business — which appears to have good operating momentum — for a minority stake in a business that already has two large shareholders, in Sun Life and CI chief executive William Holland, who owns a 9% stake.

Simply put, Canada’s larger financial institutions typically don’t share their ‘toys’ well with others.