Dundee sells banking unit to Scotia

In an abrupt about-face, DundeeWealth Inc. announced this morning that it intends to sell its banking unit to Scotiabank, in a combined deal worth $608 million.

Under the terms of the agreement, Scotiabank will purchase Dundee Bank for $260 million in cash and acquire 18% of DundeeWealth — 27.3 million shares, priced at $12.76 per share — for $348 million. The transaction, subject to regulatory approvals, is expected to be complete by the end of September.

Although Dundee Corporation remains the controlling stakeholder of DundeeWealth, the agreement also gives Scotiabank the right to nominate up to three members of the DundeeWealth board of directors.

Part of the deal includes a shareholders agreement with Dundee Corporation that gives Scotiabank the right of first offer and the right to match any third-party offer if the company decides to sell its shares of DundeeWealth. The same rights are extended to Dundee if Scotia decides to sell its shares of the wealth management firm.

Also under the terms of the transaction, DundeeWealth and Scotiabank have agreed to a three-year white labelling service agreement, a joint venture intended to “respect the investment products and services created by DundeeWealth.” Banking unit products, specifically the Dundee Investment Savings Accounts, are covered by the white label agreement, and distribution of Dundee Bank products will continue to be made available through the FundSERV model used by Dynamic Mutual Funds.

“Our relationship with Dundee goes back 15 years, and we’ve had excellent relationships with them. We saw a strategic opportunity here, and the conversation started,” said Barb Mason, executive vice-president, wealth management, at Scotia.

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“We were looking at an opportunity to explore a new platform for acquiring deposits and help grow our deposit book through alternate channels, so this gives us a great opportunity to do that,” she said. “On the equity participation in the DundeeWealth company, [we saw a] very sound asset management firm, very strong in the independent advisor space, and we felt it was a worthwhile investment for us.”

Dundee says the transaction will immediately expand the company’s product manufacturing capability. Scotiabank president and CEO Rick Waugh calls the deal a strategic investment and “an important step in our continuing strong focus on wealth management.”

Also in a press release issued this morning, DundeeWealth’s president and CEO, David Goodman, said selling the bank “is a decision that allows us to reinforce DundeeWealth’s focus on our strength as one of Canada’s leading money managers.”

The sale comes just three months after the company’s founder, Ned Goodman, stepped down as CEO, handing the reins to his son David. Goodman Sr. is long known in the industry for railing against Canada’s Big Five banks, calling the institutions a cartel and oligopoly that unfairly takes market share away from independent brokerages and investment dealers.

Dundee Bank received its bank charter from the Ministry of Finance in 2004 and had tried to compete on that front in an effort to keep banks from growing their share of mutual fund and institutional clients.

The sudden disappearance of liquidity for asset-backed commercial paper is widely seen as the catalyst for the deal. When the market for ABCP dried up in August, Dundee bought $400 million worth of commercial paper from its money market funds, and then bought back another $387 million from Dundee Bank.

“I think that if you ask Ned and David [Goodman], they’d both say that the markets in which they were participating, in terms of building up a new bank, [is] a more difficult market today than it was six weeks ago, with the fact that structured credit isn’t an opportunity now like it was,” said Mason. “They want to really focus on the stuff that they’ve been outstanding at, and that’s where the discussion came in on us buying the bank.”

Long the laggard among the big banks in the mutual fund market, Scotia has recently devoted more attention to asset management, shifting its focus from wraps full of third-party funds to in-house product.

When asked if the Dundee deal was part of a larger strategy to grow this segment through acquisition, Scotiabank’s Waugh was coy: “We’ll keep all our options open.”

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Filed by Advisor Staff

(09/18/07)