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IGM diagnosis finds value in Saxon

Fund giant IGM Financial Inc.'s move to swallow money manager Saxon Financial Inc. for $287-million in cash will not only boost assets, but also secure a pipeline to the investment wealth of the country's doctors.

IGM, which owns Investors Group Inc. and Mackenzie Financial Corp., will get $13-billion in assets with the lion's share now held by members of the Canadian Medical Association (CMA) and their families.

The $21-a-share bid for Saxon is part of the ongoing consolidation of Canada's fund industry, and follows a recent takeover of Phillips Hager & North by Royal Bank of Canada.

"It's a pretty fair bid," said Carl Hoyt, a portfolio manager with Vancouver-based Cypress Capital Management Ltd.

"It's one of the reasons we tend to hold asset managers," said Mr. Hoyt, who owns Saxon shares in two AGF mutual funds that he manages.

"There is a limited number [of them], and they are attractive takeover targets. ... There won't be many independents left."

The offer by Winnipeg-based IGM, Canada's second-largest fund firm, is about 65 per cent more than last Friday's $12.70 closing price for Saxon shares.

Saxon's three businesses include $2-billion in mainly no-load mutual funds, $11-billion in institutional assets run by its Howson Tattersall Investment Counsel Ltd. unit, and a private client business.

Toronto-based Saxon, which went public in 2005, is 30 per cent owned by the business arm of the CMA. It owns a financial planning unit catering to physicians, and MD Management Ltd., a fund company whose products are run by external managers. Howson Tattersall runs $9-billion of MD's assets as part of its institutional business.

The relationship with the CMA as a channel of distribution "is something that has significant value," said Robert Tattersall, who became Saxon's chief executive officer after the departure of Allan Smith in May. "It gave us appeal in the minds of potential acquisitors."

When the transaction is completed by or close to Sept. 30, Saxon will become part of IGM's Mackenzie division, which sell its funds through independent financial advisers.

Mackenzie CEO Charles Sims said his firm was interested in Saxon's value-oriented stock and fixed-income offerings to expand its product line, but that its "strategic relationship with the CMA" was also very attractive.

Under long-term agreements signed with the CMA, Mr. Sims said that, in addition to Saxon, Mackenzie will eventually run some MD Management funds.

As part of the transaction, IGM has a lockup agreement for 45.5 per cent of Saxon's shares. That includes CMA's stake, while the balance is held by Mr. Tattersall and partner Rick Howson. The pair will continue to run funds under the Saxon brand name for Mackenzie until at least 2010.

That arrangement is similar to Mackenzie's 2006 purchase of Cundill Investment Research Ltd., another value shop with more of a global outlook that was founded by investment guru Peter Cundill.

"They kept their own identity; they kept their own investment style and [also] portfolio management team," Mr. Tattersall said. "Mackenzie has great credibility as far as we are concerned."

A special committee of Saxon's board of directors decided to review its strategic alternatives to "maximize shareholder value" about a year ago, and hired BMO Nesbitt Burns as its adviser, he said. "The process covered half a dozen or so potential [buyers]."

He rejected any notion that Saxon pursued the sale under duress. "We have $50-million of [annualized] revenues and we have $30-million in cash. So there was not a problem with the company back then or even today."

Saxon's mutual fund arm, however, has suffered from net redemptions for 11 of the past 13 months. Over the past three months, it has seen net outflows of about $39-million.

Morningstar Canada fund analyst Mark Chow said he was not surprised that Saxon's major shareholders opted to do a deal, saying the company was likely having more difficulty growing the mutual fund side through financial advisers than it thought. "Mackenzie has got roots there whereas Saxon was trying to grow roots in that area," Mr. Chow said.

In January, Saxon's mutual fund arm launched an adviser series of funds by offering a 1-per-cent trailer fee.

"It's not easy, especially with the market environment," Mr. Chow said. "Their funds have not been doing well because of their [value] style."

Growth-oriented funds have been pulling a lot of money but that approach won't always work, he said. "The value style will come back in favour."

SAXON FINANCIAL (SFI)

Close $20.82, up $8.12

© 2007 The Globe and Mail. All rights reserved.

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