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CI deal shakes up mutual fund sector

Firm snags financial planners Assante, Synergy in billion-dollar buying spree

CI Fund Management Inc. reshaped the Canadian mutual fund industry yesterday by completing a billion-dollar shopping spree that will see it enter the financial planning business.

The company agreed to pay $846-million in cash and stock to acquire the domestic operations of Assante Corp., a Winnipeg-based fund manager that employs about 1,000 financial advisers. Separately, CI said it will pay $116-million in cash and shares to buy Synergy Asset Management Inc., a small Toronto asset manager.

The deals will make CI the country's second-largest manager of mutual funds, behind Investors Group Inc., and give it control of almost $45-billion in assets under management. It is currently the sixth-largest fund company in Canada.

"I am convinced that these [acquisitions] will uniquely position us to be one of the very few clear winners in the hypercompetitive Canadian mutual fund business," said Bill Holland, CI's chief executive officer.

By acquiring Assante, CI not only eliminates a competitor but also secures an important sales force for its funds. As one of the country's largest financial planning firms, Assante was one of CI's biggest customers. But its strategy of encouraging advisers to pull money out of external funds and put it into Assante's own proprietary products -- to reap bigger margins -- has slowly put the squeeze on many fund management companies, including CI.

"Whether you want to be in financial planning or not doesn't matter any more," Mr. Holland said.

"You start looking at it and say, 'It's in our best interests to provide a very stable environment for independent financial planners' . . . I look at it as something we just have to do."

Analysts praised the move, CI's second largest acquisition in 15 months.

"It's a great deal," said Dougall MacPhee, who covers the asset management industry for brokerage Raymond James Ltd. "They are buying good businesses at the right price. There's no way you could view this negatively from CI's perspective."

The deals will add immediately to CI's earnings per share, Mr. Holland said. The expanded company should earn about $325-million in its first year, he said, which would be about $1.09 per share. CI currently expects to earn about 95 cents a share this fiscal year.

One industry executive said CI was under some pressure to do a bold deal because of a looming deadline with its major shareholder, Sun Life Financial Inc.

Last year, Sun Life acquired a 30-per-cent stake in CI in exchange for the insurer's mutual fund subsidiaries, and later increased it to 34 per cent. But many in the fund business believe it's "just a matter of time" before Sun Life makes a bid for the whole company, so CI management is anxious to get the stock price up before that happens, said the executive, who spoke on condition of anonymity.

"This [deal] is a function of two really aggressive companies. One is CI, but the other is Sun Life."

Sun Life is spending $271-million to buy more CI shares so that it can keep its stake in the enlarged company at 34 per cent. CI will use the money in the cash portion of the Assante and Synergy deals and will also take on $75-million in debt, Mr. Holland said.

The fund sector has experienced a wave of mergers and takeovers since the late 1990s, sweeping away large independent players like Trimark Financial Corp. and Mackenzie Financial Corp. With only a handful of publicly-traded companies left, smaller fund managers are the only ones left to buy.

In addition, a three-year bear market has soured investors on mutual funds. Through July, Canadian investors have redeemed $2.6-billion in fund units so far this year.

"I think everyone pretty much agrees you have to be big to survive in this industry, and CI's doing all the right things," said Scott Mackenzie, president and CEO of Morningstar Canada, a fund research firm.

For Assante, the transaction will end a tumultuous four years as a public entity. The company, the brainchild of CEO Martin Weinberg, went public in 1999 at $9.50 a share. But the shares quickly sank below that level and stayed there, despite growing profits and rising assets under management.

The company hired investment bankers earlier this year after receiving what it called an unsolicited offer and has been seeking out a buyer for several months.

"I can sum up the transaction by saying it's the right deal at the right time," said Mr. Weinberg. Assante shareholders will get cash and CI stock worth $8.25 a share, based on Thursday's closing price for CI shares.

They will also get a piece of Assante's U.S. unit, which includes a sports management business that represents professional athletes. CI did not want the small U.S. business, which is worth an estimated $118- to $136-million, so Assante will spin it out to its shareholders as an unlisted company that will trade only on an over-the-counter basis. Mr. Weinberg and his senior executive team will run it.

By acquiring Synergy, CI will get $1.5-billion in mutual fund assets. But the company will also get the services of Synergy CEO Joe Canavan, a respected industry veteran who will be put in charge of the Assante unit.

CI shares fell 7 cents yesterday to finish at $13.33 on the Toronto Stock Exchange. Also on the TSX, Assante's stock rose 30 cents or 3.5 per cent to $9.

CI made another deal this week, acquiring Skylon Capital Corp. for $32-million in a transaction announced Thursday.

© 2007 The Globe and Mail. All rights reserved.

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