What Would a Scotiabank/CI Merger Look Like?

A sale of Bank of Nova Scotia’s (BNS) mutual fund business to CI Financial Income Fund (CIXUF.PK) would likely require an equity stake in the wealth management firm, given Scotiabank’s desire to increase its exposure to this type of business. But, in order to demonstrate the impact an equity issue by CI would have on Sun Life Financial Inc.’s (SLF) nearly 40% ownership position, a valuation of Scotiabank’s mutual fund operations is required.

This ranges anywhere from C$780 million to C$1.7 billion, according to GMP Securities analyst Stephen Boland. Given that recent deals like IGM Financial Inc.’s (IGIFF.PK) purchase of Saxon Financial Inc. (SXNFF.PK) were done at multiples in the range of 9 - 10 times, he considers 9x appropriate for Scotia’s fund operations. This is because its assets under management [AUM] may be stickier, since they come from bank branches and brokers. This metric produces a value of roughly C$1.2 billion for the business, Mr. Boland said in a research note, adding that it could prove to be much higher or lower.

If the deal is executed with CI shares at C$23, the company would need to issue 52.3 million shares to Scotia, representing a 15.8% stake. However, if Scotia wanted a larger piece of CI, it could sell its 20% stake in DundeeWealth Inc. [TSX:DW], a firm that CI said it was interested in buying back in 2007. (Mr. Boland believes Dundee Corp. has the right of first offer and right to match a sale of DundeeWealth shares.)

This would give Scotia nearly 20% of CI, CI 20% of DundeeWealth, while Sun Life’s stake in CI would dip below 30%. However, Mr. Boland thinks Sun Life would not agree to this dilution without something direct in return, given how successful its relationship with CI has been. This could include giving its customers access to Scotiabank’s banking products.

Mr. Boland said,

The difficulty in a transaction involving BNS is the assumption that SLF would allow another institution to repeat this success with CIX and be given the same access to wealth management products that SLF currently offers or may offer in the future.

The analyst noted that Scotiabank would likely agree as long as it could maintain its percentage stake in CI and possibly increase it in the future, as financial service firms are all competing for a “slice of the wallet.”

Finally, if Scotiabank requires a similar stake in CI as Sun Life, CI can issue less equity since some can come directly from Sun Life. This would provide both with equal influence and board representation, perhaps signalling that the two have a coordinated long-term wealth management plan, Mr. Boland suggested.