(Adds analysts’ comments, updates share prices)
By Lynne Olver
TORONTO, Oct 6 (Reuters) - Bank of Nova Scotia (BNS.TO) said on Monday it will buy Sun Life Financial’s (SLF.TO) stake in fund manager CI Financial CIX_u.TO for C$2.3 billion ($2.1 billion), boosting the bank’s wealth management operations and providing Sun Life with cash to go after acquisitions.
Shares of Sun Life plunged as much as 16 percent, even though some analysts suggested that Scotiabank was overpaying for the 37.6 percent ownership stake in CI Financial, the country’s third-largest mutual fund company.
“Probably part of the speculation in the market — and I’m not in this camp — is that Sun Life is raising this cash to shore up some sort of capital deficiency,” said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.
“I don’t think that’s the case, I think all the Canadian lifecos are in adequate, if not better-than-adequate, capital positions.”
The cash deal for 104.6 million CI units, at C$22 per unit, will make Scotiabank the biggest shareholder in CI and will immediately increase Scotiabank’s profit, executives said.
CI had about C$99 billion in fee-earning assets as of July 31, mainly in retail mutual funds.
RBC Capital analyst Andre-Philippe Hardy said Scotiabank had found “an expensive way” to expand its wealth management business, noting that the purchase price was a 32 percent premium to CI’s closing unit price of C$16.64 on Friday.
By early afternoon, shares of Sun Life were down 8.3 percent at C$33.03 on the Toronto Stock Exchange, while Scotiabank shares were down 5.7 percent at C$44.46 amid a broad-based decline in stocks. Units of CI Financial were up 1.4 percent at C$16.87.
The hasty deal involving CI came together over the weekend, after Sun Life approached Scotiabank on Friday about a possible transaction, said Chris Hodgson, the bank’s executive vice president and head of domestic banking.
That prompted analysts to press Sun Life executives about whether they needed to raise capital fast because of internal issues, but they insisted that was not the case.
“Even without this transaction, our capital position is strong,” Sun Life Chief Financial Officer Rick McKenney told a conference call.
“We’re in a strong position going into this (deal),” Chief Executive Don Stewart said.
For Sun Life, which took an initial 30 percent stake in CI Financial in July 2002, the sale opens the door to potential purchases in an era of unprecedented turmoil in the financial services sector.
“We see opportunities in the U.S., we see opportunities in the rest of the world,” Stewart told the call.
The company would be capable of doing more than one transaction, he said, if they were in different business lines and different geographic areas.
Analysts expect Sun Life and its larger Canadian rival Manulife Financial Corp (MFC.TO) to bid for some of the assets of U.S. insurance giant American International Group. Asian insurance and wealth management, as well as the U.S. annuities business, are seen as areas of interest for both companies.
For Scotiabank, the CI stake is the latest in a series of recent wealth-management buys. It will add 4 Canadian cents a share to Scotia’s profits in the first year, rising to 8 Canadian cents by the third year, bank executives said.
With this investment, and last’s year’s purchase of a minority stake in DundeeWealth Inc (DW.TO), “we have a very strong association with two of the leaders in the mutual fund industry,” Scotiabank President and Chief Executive Rick Waugh said.
The bank likely has further plans for its CI holding, analysts said. To increase its stake in the wealth management company, Scotiabank could either buy CI outright, or sell its own mutual fund business to CI, “which we believe is more likely,” John Aiken, an analyst at Dundee Securities, wrote in a research note.
The deal is expected to close in 45 days.
An existing distribution partnership between Sun Life and CI will continue, CI Chief Executive Bill Holland said in a statement. ($1=$1.08 Canadian) (Additional reporting by Scott Anderson; Editing by Peter Galloway)