Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I’m on the line with analyst Gregg Warren who covers CI Financial for us.
Gregg thanks so much for joining me.
Gregg Warren: Thanks for having me.
Redmond: After acquiring its initial position in CI in 2008, Scotiabank currently holds about 37% of CI and at market value that’s around $3.8 billion. But last week Scotiabank announced that they were looking to unload all of their shares. So Gregg why did Scotia do this?
Warren: Well, Scotia is in an interesting position here. Basically with the Basel III rulings coming down, banks are now required to adjust capital on their books for investments in asset managers. We've seen that here in the States where some asset managers or banks have decided to sell off their stakes in asset managers—BlackRock comes to mind in that regard. We also have Bank of America and Barclays both selling off stakes because they have to keep extra capital on the books. I think that’s the driving force behind the decision. Also, part of the reasoning is the poison pills that CI Financial has in place, and that really put Scotia in a position where selling is the best option.
Redmond: Okay, and do you think they are going to sell it all at once or are they going to sell it in increments? Although there is that provision that they can't sell 20% or more to one buyer.
Warren: Right, they can’t sell larger than a 20% stake, so they'd have to at least have two buyers involved in the sale. It's in their best interest and CI shareholder's best interest for them to do this in an orderly manner, for them to figure out the best possible way to sell the shares. You could even have CI Financial potentially stepping in and buying up a big chunk of the stake. We've done some estimates on our side and we think that they could probably take about a third of the stake as a share repurchase take on some debt on the books and not really run into too many issues with their debt covenants and sort of debt targets that they have in mind.
But it is something that they could do and it wouldn’t necessarily be too dilutive to earnings in the near term for them. So there are definitely some options available. I know that CI has been talking with Goldman Sachs. So, they are going to try and find out the most orderly way to do this because the last thing anybody wants is for Scotiabank to dump everything on the market at once.
Redmond: And how did shares of CI respond to the news?
Warren: CI shares are probably down about 12% since the announcement came out. I think it was trading around $37, and now it's about $33. So, it has had an impact. But, when BlackRock announced big share sales in their investments, or when Barclays announced that they were going to sell some of their stake then stocks definitely took a hit. There was a big concern. Shares ultimately end up getting sold at a discount to the market price because if you're moving a large portion—if you're moving 5% or 10% and other buyers are picking it up—then there will be some discount involved. But it's better than having all of that stock hit the market at once.
Redmond: Are there any new developments with the story that you can share with us? Anything that's happened this week?
Warren: I haven’t seen anything. CI did come out almost immediately after the announcement and say that they were looking at options within their organization—looking at the balance sheet, looking at dividends, trying to figure out what they were going to do from their end. Then the announcement that they were going to work with Goldman Sachs came out. Overall, the stocks drifted based on what news is already out there.
Redmond: How does this affect your opinion of CI?
Warren: It doesn't really impact our opinion on CI. It's more of a share capital situation overall. CI Financial is still a great asset manager. They've got great performance. I don't think this is going to be too disruptive regarding their arrangement with Scotiabank as far as distribution goes. CI Financial is in one of those unique positions where they've got funds that are performing well and funds that advisors and clients want. So, no impact from perspective. It will be interesting to see what happens to the capital structure of the company itself. You'll be offsetting a lower share count with higher interest payments and a longer term debt repayment that has to come down, if they do go that route.
But overall, it doesn't change our opinion. Longer term we still think for all the independent Canadian asset managers the biggest problem is going to be competition from the banks, competition from ETFs and sort of the pricing structure that exists in Canada today.
Redmond: Great. Thanks so much Gregg.
Warren: Thank you.
Redmond: To check out Gregg's report on CI Financial, go to the stocks page of Morningstar.ca.
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