Bank of Nova Scotia (TSX:BNS) has agreed to pay $2.3 billion for all of the common shares of DundeeWealth Inc. that the bank does not own.

The agreement was announced Monday by Scotiabank, Dundee Corp. (TSX:DC) and DundeeWealth.

“The acquisition of DundeeWealth demonstrates our strong commitment to build our wealth management presence in Canada and aligns to our global wealth management strategy,” said Rick Waugh, Scotiabank president and CEO, in a release.

Noting the long relationship between the firms, Waugh commented: “Together we will provide clients, advisors and shareholders with even greater value. We also believe that Dynamic Funds, with their outstanding performance and breadth of products have excellent potential as we expand our global platform.”

Scotiabank initially bought an 18% minority stake in DundeeWealth in 2007, paying $348 million while it also bought Dundee Bank for $260 million.

As a result of this acquisition, Scotiabank will become the fifth largest mutual fund provider in Canada and the third largest among the country’s leading banks based on figures reported by the Investment Funds Institute of Canada (IFIC).

On closing, the transaction will immediately increase the bank’s presence in the third-party advisor channel and enhance products and sales support across the branch network.

Goodman leadership to continue

“I am also extremely pleased to announce that we will continue to have the benefit of the strong leadership that has built the DundeeWealth business,” Waugh added. Ned Goodman, controlling shareholder of Dundee Corp. will continue as non-executive chairman of DundeeWealth and as a sub-advisor managing Dynamic’s Focus+ Resource Funds. David Goodman will remain DundeeWealth’s president and CEO and head the firm’s investment management activities together with their sales and distribution platforms.

“We believe that this is the right direction for DundeeWealth and for all of our stakeholders, and recommend that our shareholders accept this strong offer,” said David Goodman. “Scotiabank has a history of working well with independent professionals and, as they have demonstrated so clearly with Dundee Bank of Canada, will be an excellent partner for our advisors.”

“This announcement gives us significant scale in Canada and accelerates growth across all channels,” said Chris Hodgson, group head, Scotiabank Global Wealth Management. “We are committed to the advisor channels and to providing these advisors with the tools they require for success. With our well-established distribution network in international markets, we also see an exciting new opportunity to take Dynamic’s capabilities global.”

Bank to maintain Dundee’s relationship with independent advisors

On a conference call with analysts, Scotiabank executives stressed that they intend to maintain Dundee’s relationship with independent advisors, and minimize the threat of sales channel conflict.

In terms of bringing a large independent fund company under the umbrella of a big bank, Hodgson said that he plans to reach out to independent advisors in the wake of the deal. “I will be speaking with a lot of the advisors today to ensure that they get a clear message that we are going to support them, and their businesses and practices,” he said.

“It will be our plan to work through Dundee Wealth to really ensure that we promote the growth of the independent channel,” Hodgson added.

He also pointed out that Scotia has had success acquiring other businesses and maintaining their entrepreneurial spirit, and in working through independent advisory channels without compromising their client relationships — for example, it has substantially grown the assets under Dundee Bank through the independent channel, while also maintaining client privacy.

Another possible source of channel conflict is the large bank-owned dealers, which will have client assets under administration that are now under management at Scotia. Hodgson conceded that the amount of Dynamic funds sold through the distribution networks of other banks is “not insignificant”. However, he said that “the issue there is all about branding and performance”, and while it has considered that aspect of possible channel conflict, they don’t think it will be an issue.

In terms of beefing up the prominence of Dundee’s products within Scotia’s own domestic distribution network, Hodgson said the bank hasn’t made any decisions on that yet, although he stressed that it will be looking for ways to bring the Dynamic funds to its global businesses. “We have significant opportunities in some of the markets that we operate in outside of Canada, from a mutual fund perspective,” Hodgson said. “We want to look at ways to leverage the Dynamic brand, which we think is significant.”

On the subject of Scotia’s other major wealth management investment — its 36% stake in CI Financial — Hodgson said the bank continues to value that arrangement, the DundeeWealth deal doesn’t mean anything definitive for the CI investment, and the bank’s options remain open in terms of what to do with CI in the future.

“We felt that, at this point in time, this [deal] is absolutely the best move for us. But, we’re able to keep options open, and we have a very strong relationship with the CI group, and we’ll continue to look for ways to build our investment, it’s very important to us,” he said.

Hodgson noted that the bank recently directed some investment mandates to CI, based on performance, and that it continues to look for ways to leverage that investment, however, its top priority now is integrating Dundee.

“First and foremost we’re going to be looking at how we leverage off of this transaction and create a best-in-class platform in terms of Scotia funds and DundeeWealth. I think this leaves us with options, and we’ll certainly explore those in the future,” he said; adding, “I wouldn’t lead too much into this in terms of where we may go next.”

Transaction details

The value of the offer to DundeeWealth shareholders is $21.00 per common share representing an enterprise value for DundeeWealth of approximately $3.2 billion. Scotiabank will offer 0.2497 of a Scotiabank common share and, at the election of each shareholder, either $5.00 in cash or 0.2 of a $25.00, 3.70% five year rate reset Scotiabank preferred share for each DundeeWealth common share (including common shares issuable on conversion of other shares). Prior to closing, DundeeWealth shareholders will also receive a special distribution of $2.00 per share in cash as well as an interest in Dundee Capital Markets, with an approximate value of $0.50 per DundeeWealth share, which DundeeWealth will spin out to its shareholders in connection with the transaction. The transaction has an approximate cost of $2.3 billion to Scotiabank for the portion not currently owned.

Scotiabank has entered into a lock-up agreement with Dundee Corp., the largest shareholder of DundeeWealth. Dundee Corp. owns 48% of DundeeWealth. As a result of Dundee Corp.’s commitment to tender, on completion of the offer Scotiabank will own at least 67% of DundeeWealth. After the completion of the offer, Scotiabank also expects to proceed with the acquisition of the balance of the common shares of DundeeWealth.

Ned Goodman, controlling shareholder of Dundee Corp. and David Goodman have irrevocably agreed to vote their Dundee Corp. shares in support of the transaction at a shareholder meeting. Ned Goodman and David Goodman have both agreed to tender their DundeeWealth shares to the offer.

In addition to customary conditions, the offer is conditional on the payment of the special dividend by DundeeWealth, DundeeWealth having completed the spin out of Dundee Capital Markets and Dundee Corp. having the requisite shareholder approval for the sale of its DundeeWealth shares. The offer is not subject to a minimum tender condition.

Full details of the offer will be included in the formal offer and take-over bid circular that is expected to be mailed to DundeeWealth shareholders in December.

with files from James Langton

IE