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Look who's getting squeezed now

Well, this is quite a box he's got himself into now, isn't it? No, not Ned Goodman: We're talking about his new pal, Rick Waugh.

Last week, the Bank of Nova Scotia boss looked like Bay Street's new master of the deal. First, he gave a big loan to help DundeeWealth, the Goodman-controlled financial services group, out of a tight spot. Then he used that position to buy 18 per cent of that business, at a very reasonable price, and negotiated first dibs on the other 82 per cent to boot. Such a clever lad, Rick Waugh. Who says Winnipeg produces nothing but hockey players and frostbite?

But it's all part of the plan. Scotiabank's Achilles heel is money management, a great business opportunity that it has largely squandered. Of the Big Five banks, it's dead last in mutual fund assets, with $18-billion (Bank of Montreal, the next-smallest, has $38-billion). It employs 30 per cent fewer investment advisers than the brokerage arms of either Royal Bank or BMO. Scotiabank is so far behind, it needs binoculars to see the competition's backside.

This is the kind of problem that bankers don't usually like to talk about. On second thought, maybe they do. Here's Mr. Waugh in 2004: "We will find new ways to grow in wealth management." In 2005: "We are making wealth management a top priority." After the annual meeting in 2006: "It's very important for us to grow in wealth management, and particularly here in Canada." The man has staked a lot of his credibility as CEO on solving this.

Trouble is, there's virtually nothing to buy. Of the Canadian fund companies with at least $15-billion in assets, every one is owned by a big bank, a big foreign company, or the employees, with two exceptions: DundeeWealth, and AGF Management, each run and controlled by the founding family, neither willing to sell.

This summer, fate gave Mr. Waugh his chance when Dundee got caught in the credit squeeze. The result was a nice, clubby little deal that gave Scotiabank a toehold in one of the fund industry's fast growers. Over the past five years, while Scotia was adding $5-billion in mutual fund assets, Dundee grew by about $15-billion (more on that in a moment).

Then Bill Holland of CI Financial had to go and ruin everything, lobbing a bid for the whole company at a huge premium to the market and to what Scotiabank paid. There are only two possible outcomes now: (1) the Goodman family refuses to sell at any price or (2) Dundee will start a full-blown auction that will see Mr. Waugh bidding against CI, Manulife Financial and God-only-knows who else. Let's consider these one at a time.

In scenario one, Mr. Waugh gets his 18 per cent, but with little chance of getting the big prize - control - in the future. Ned Goodman will turn 70 in November. If he isn't going to sell the business now, that implies the decision will be left to his son, David Goodman - who, by the way, is 43 years old and has been the CEO of DundeeWealth for exactly 99 days. Do you really think he'll be anxious to sell? The Americans might get a man to Mars first.

In scenario two - the auction - Mr. Waugh has the upper hand. The minority stake, and the right to match any offer, are powerful advantages. But they are offset by a couple of factors. Scotiabank trades at 12 times earnings; CI's bid, $2.36-billion, values DundeeWealth at about 30 times profit. Matching it would require the bank to deplete its excess capital.

Ian de Verteuil, the sharp-eyed bank analyst at BMO, figures that at that price, Scotiabank could still make the deal and not hurt its per-share earnings, if it cut $75-million in costs. It could surely do that, as there's overhead to chop; David and Ned Goodman together received $5-million in salary and bonuses last year. But what then? The big reason Dundee has grown so fast is that it was early to spot some investing trends (real estate, income trusts, natural resources). Part of the credit, surely, belongs to Ned Goodman and his intuition for the market. Removing him would hurt the business. And what about Dundee's star money managers - would they work for a bank?

You can see Mr. Waugh's predicament if this goes to a bidding war. If he wins, he will be paying full price - certainly more than CI's proposed $2.36-billion - for a business that would not be quite the same once he owns it. But if he loses, he's blown a chance to fulfill his promise to get serious about wealth management. Scotiabank has done some of its best deals buying broken or temporarily distressed assets, such as Montreal Trust or Mexico's Inverlat. Mr. Waugh thought he had done it again with Dundee, until Bill Holland got in the way.

© 2007 The Globe and Mail. All rights reserved.

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