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Quebec company's Clarington bid said at risk

Industrial Alliance takes loss provision

MUTUAL FUNDS REPORTER

Industrial Alliance group has taken a $77.9-million provision to cover losses tied to troubled hedge fund manager Norshield Financial Group, and analysts said that could put at risk the Quebec City company's bid to acquire fund company Clarington Corp.

It's the latest twist in the complex battle for Clarington, a Toronto retail fund company with about $4.1-billion in assets under management.

On Thursday, the receiver of Norshield said the company's investors stand to recover only a "nominal" amount of the $132-million they had invested. The Montreal company was put into receivership in June by regulators.

Industrial Alliance Insurance and Financial Services Inc. clients had close to $80-million invested with Norshield and the firm pledged late yesterday to cover those investments.

"None of our clients will lose money in this affair," said Yvon Charest, Industrial Alliance president and chief executive officer. "Long before the Richter report was tabled, we made sure that we protected the interests of our clients by transferring all amounts invested in Norshield funds to other funds, thereby substituting for them as investor in Norshield funds."

But Mr. Aiken fears Industrial Alliance's $77.9-million provision -- up substantially from an initial pool of $13-million -- may thwart the company's pursuit of Clarington.

On Nov. 7, Industrial Alliance made a friendly $210.9-million offer for Clarington that valued shares at $14.25 each.

Industrial Alliance will finance the deal with $111-million in cash and a $100-million preferred share issue.

The provision "increases the risk that Industrial Alliance may walk away from the burgeoning bidding war," John Aiken, an analyst at National Bank Financial Inc., said in a report.

"The balance sheet is still strong but it's not as strong as it was when they announced their bid," Mr. Aiken said in an interview.

David Scandiffio, president of unit Industrial Alliance Fund Management Inc., said the company is "well capitalized" and its pursuit of Clarington "won't be easily influenced."

In other developments, CI Fund Management Inc. kept up its attack on the Clarington offer from white knight Industrial Alliance. Under the terms of a support agreement between the two companies, the Quebec firm may match a rival offer for Clarington without taking into account the interests of investors that own Clarington's mutual fund fees, terms CI described as "ridiculous" and detrimental to unitholders.

On Nov. 14, CI of Toronto made a hostile bid for Clarington that values the company at $14.75 a share and includes substantial fee reductions for Clarington fund unitholders.

The rival cash bids do not include the assumption of about $59-million in Clarington debt.

The battle for Clarington has put the fund company's board of directors "between a rock and a hard place," said Stephen Erlichman, a partner at law firm Fasken Martineau DuMoulin LLP in Toronto, who wrote a landmark report on fund governance in 2000.

The six-member board has "conflicting fiduciary duties" and must juggle the competing best interests of shareholders and mutual fund unitholders, he said.

© 2007 The Globe and Mail. All rights reserved.

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