Laurentian Bank is accelerating its growth as it further beefs up its B2B Trust subsidiary by acquiring AGF Management's trust operations for $415.5 million, its second large deal in six months.
The move follows last November's $165-million purchase of the MRS companies from Mackenzie.
"We firmly believe that by acquiring AGF Trust we are putting in place yet another building block to solidify Laurentian Bank's future," CEO Rejean Robitaille said Wednesday during a conference call.
The deal will improve the bank's performance by increasing the scale of its operations, optimizing its efficiency and increasing net interest income and margins, said Robitaille.
"It leverages B2B Trust's solid base of business, lifts its already strong scale and efficiency to an even higher level and in one fell swoop expands B2B Trust's network," he told analysts.
The addition of the Toronto-based trust also diversifies the bank's portfolio and profitability.
Last year's acquisition of MRS has helped to offset weakness in the B2B Trust main business. Excluding MRS, the trust's companies revenues were down four per cent and income was off 13 per cent in the first half of the year.
"Without the acquisition of MRS, B2B revenue would be down and it's almost all due to margin compression," added Francois Desjardins, head of B2B Trust.
During the second quarter, MRS contributed $10.7 million of B2B Trust's $39.8 million of revenues. It also earned $10.6 million.
AGF Trust will add $3.1 billion of loans and $2.9 billion of deposits, raising B2B Trust's total loans and deposits to $22.1 billion. The number of clients will increase 25 per cent to 750,000, while 300 employees will be added.
Laurentian Bank (TSX:LB) is paying net book value at closing for AGF Trust of about $242 million in cash. It will also repay $109.5 million in subordinated debt and the $64 million preferred share from AGF Trust to AGF Management Limited.
AGF is expected to add $28 million to $30 million to 2014 net income. Pre-tax integration costs are expected to be $30 million to $35 million and will largely be incurred in 2013.
AGF Trust provides guaranteed investment certificates and other savings products and lends money for investment and real-estate deals. It's represented by 20,500 financial advisers and 1,050 mortgage brokers across Canada.
B2B Trust, which will absorb AGF Trust, will continue to offer similar products through a total of more than 27,000 advisers.
The deal gives AGF Management a war chest of $615 million including lines of credit to hunt for global acquisitions as it looks to strengthen its core investment management business.
AGF Management (TSX:AGF.B) says it will use money from the sale and its line of credit to grow its investment management business.
"There are a number of organizations today that are looking to exit the investment management business that we feel it's an extremely exciting period frankly in our industry despite the challenges today," Blake Goldring, AGF's chairman and chief executive officer, said during a separate conference call.
The wealth-management and mutual fund industry has been going through a period of consolidation, with the survivors using their increased economies of scale to overcome thinner margins and investors' caution during volatile times.
One of the biggest deals in recent years, Scotiabank (TSX:BNS) acquired full ownership of DundeeWealth Inc. by spending about $2.3 billion for the shares it didn't already own. That deal was announced in 2010 and completed last year.
About the same time, AGF purchased Acuity Funds, a mid-sized independent player, in a $325-million deal that increased the companies' combined asset base by about 16 per cent.
Goldring told analysts Wednesday that the strong Canadian dollar will help AGF's expansion efforts, especially in the United States.
Barclays Capital analyst John Aiken said in a research note that the transaction is a slight positive for AGF but doesn't solve the challenges facing its main asset management business.
"Not only does it dispose of operations that we considered non-core at best and a distraction to management at worst, it increases its cash position allowing for greater strategic alternatives for its core, asset management operations," he wrote.
"However, we underscore that this transaction does not solve any of the issues facing AGF in its asset management business. We still believe that the volatility in the markets will keep investors on the sidelines, negatively impacting gross and net sales levels as well as investment performance."
He said AGF would need to buy back about 20 per cent of its shares to reduce the hit from a reduction in the trust's earnings.
Blake said AGF has delivered "considerable value" since it acquired Chancellor Trust in 1988, which remained focused primarily on the prime mortgage business until 2000. But a strategic review last fall led AGF to decide to exit the trust business and recognize in B2B Trust a "formidable competitor" that shares the same vision.
DBRS Rating Service said the acquisition by Laurentian (TSX:LB) is consistent with its strategy to build scale and distribution in its B2B Trust (B2B) business. But it said the second deal in months raises some concerns about the pace of integration.
"However, our concerns are partially mitigated by the fact that the bank’s first acquisition, MRS Trust and related companies, which closed in November 2011, appears to be progressing on schedule with its integration plan," it said in a report.
On the Toronto Stock Exchange, AGF Management's shares closed at $12.24, up 52 cents or 4.4 per cent in Wednesday trading. Laurentian's stock gained $1.11 or 2.69 per cent to $42.35.