Canaccord Capital has proposed a massive buyout and the key lies overseas.Lyle Stafford/The Globe and Mail
To understand why Canaccord Genuity Group Inc.’s CF-T executives would pony up $1.1-billion for a management buyout during a brutal market for investment banks, ignore everything the company used to stand for. The answer, very likely, lies across the Atlantic Ocean.
Historically, Canaccord Genuity chief executive Dan Daviau had a reputation for being obsessed with deals. The same goes for the company’s chairman, David Kassie. They are investment bankers to the bone, which means they love advising clients who are buying and selling companies. The adrenaline – and the fees – get them going.
For years this obsession explained why Canaccord Genuity would make so much money during bull markets, because deal volume would soar. But it is also the reason the investment bank’s shares have suffered during downturns. Advisory fees would dry up, and there wasn’t much else to cushion the blow.
To fix this, Canaccord Genuity has revamped a good chunk of its business model, and this very switch may be central to management’s decision to launch a $1.1-billion private buyout of their firm this week. A special committee of directors has rejected the proposal, which is worth $11.25 per share, but hasn’t said why.
The rejection is all the more notable because Jill Denham, the special committee’s lead director, is a long-time colleague of Mr. Kassie, going back to their time together at CIBC World Markets. Ms. Denham declined to comment for this story.
A few years back, frustrations with Canaccord Genuity’s boom and bust cycle boiled over. The investment bank is best known for advising mining companies, but scores of mining deals blew up after the commodity supercycle crashed in 2012. The investment bank’s share price collapsed and employees started to flee.
It was then that Mr. Daviau knew he had to keep broadening Canaccord Genuity’s focus, so he started putting more emphasis on, and more money into, the company’s wealth management business – particularly in Britain. His goal: To build out a much less volatile division, so that when deal volume dropped, there were still ample fees. Unlike investment bankers and traders, money managers charge a percentage of their assets under management.
The problem is that public investors aren’t entirely convinced. Canaccord Genuity’s stock is in much better shape than it was in 2016, trading at $8.61 per share before the management buyout was announced, whereas in early 2016 it was hovering around $3.90. But it’s still down 48 per cent from the November, 2021, peak.
No matter how much Mr. Daviau talks up wealth management, or how much profit comes from this division, the company’s shareholders seem to still see Canaccord Genuity the old way.
The fact is, capital markets profits still dominate, and they swing wildly, because Canaccord Genuity is so closely tied to growth industries like cannabis that come and go. In the first six months of fiscal 2022, which was a banner period for the company, Canaccord Genuity made $124-million in total. During the first six months of its current fiscal year, which started in April, profit has slumped to $2-million – even though wealth management itself made $34-million before taxes.
It is entirely possible the buyout group sees some value that public shareholders do not – again, particularly in Britain. A similar situation is playing out at Home Capital, which just agreed to its own privatization.
Because so much has been invested in the British wealth business, largely through the acquisitions of Collins Stewart Hawkpoint for $407-million in 2011 and of Punter Southall Wealth Ltd. (PSW) for $278-million in 2021, the division’s assets now top Canada’s, with $50-billion under management, compared with $34-billion here.
The size of the British footprint is a boon right now because asset managers there attract high valuations. Royal Bank of Canada recently bought British wealth manager Brewin Dolphin for $2.4-billion, and the purchase price amounted to 2.8 per cent of Brewin Dolphin’s assets under management. (Asset managers are usually purchased for between 1 and 3 per cent of their assets.)
If the same percentage was applied to Canaccord Genuity’s British assets – and the businesses are similar in scope, because both Brewin Dolphin and Canaccord Genuity cater to high-net-worth clients – the division could fetch $1.4-billion.
Before the management buyout was publicly announced, Canaccord Genuity was trading at a market value of around $860-million. The management group bid $1.1-billion.
But in reality, the math isn’t so simple, because the sale proceeds would be divvied up. Canaccord Genuity owns two-thirds of its British wealth arm, with the remaining third ultimately controlled by HPS Investment Partners, which is acting as the buyout’s lender. So the amount that flows to the buyout’s investors would be roughly $940-million. And there is also some debt in the business.
Canaccord’s managers are also adding roughly $825-million in new debt to fund their proposed buyout, so some of that would likely have to be paid off. Recurring interest payments are a nightmare for a volatile capital markets business.
Still, management has a central question to answer: If there’s so much value in the British wealth arm, why doesn’t Canaccord Genuity sell it now, as a public company, and let common shareholders benefit as well?
In an e-mail, a source familiar with the buyout group brushed off the suggestion that it wants to sell anything. “Even at current business levels, the offering group and the lender are satisfied that the company can service the debt, while maintaining financial flexibility for continued investment in our business if opportunities arise,” they wrote.
As a private company, though, Canaccord Genuity could do whatever it wants, and it could be tricky for aggrieved shareholders to stop the buyout because the company’s stock isn’t controlled by large institutional investment mangers. Its three-largest institutional owners control only about 6 per cent.
That puts more emphasis on the special committee directors who are reviewing the bid, because dispassionate owners, such as retail investors, are more likely to follow their recommendations.