Industrial Alliance Targets C$500 Million Acquisition

Industrial Alliance Insurance and Financial Services Inc., the best-performing Canadian insurer in the past year, plans to acquire a money manager in what would be the company’s biggest takeover.

Industrial Alliance is looking for an asset-management purchase outside Quebec for as much as C$500 million ($485 million), surpassing the company’s C$200 million takeover of Clarington Corp. in 2006.

“The half a billion mark is something that we will consider,” Chief Executive Officer Yvon Charest said in a phone interview. While finding the right fit might not be easy, “we have been able to do that for mutual funds and we are confident we can do the exact same for private-client management.”

The company’s strategy to bulk up its wealth-management unit comes as foreign banks such as UBS AG exit the Canadian market, selling assets to domestic insurance companies and banks. An acquisition would help Industrial Alliance compete with the country’s five biggest banks and three largest insurers, Charest said.

Possible Canadian targets for Industrial Alliance include Cardinal Capital Management Inc., a Winnipeg, Manitoba-based firm that manages C$1.7 billion, said Michael Simpson, portfolio manager at Sentry Investments Inc. in Toronto.

Fiercely Independent

Other money managers that may fit the bill based on potential deal size are Calgary-based Mawer Investment Management Ltd., a privately-owned company with C$17 billion in assets, and Greystone Managed Investments Inc., a Regina-based firm with C$33 billion in assets under management, Simpson said.

“It doesn’t surprise me that someone might look at us-- we have a good reputation,” David Atkins, vice president of investments at Cardinal, said in a phone interview yesterday. “We’re always open to someone who wants to be a new partner, have a minority interest, or buy the company outright. That’s between the CEO and the partner.”

He declined to comment on whether the firm is in discussions for a sale.

“We are fiercely independent and would not want to be owned by a big bank, or an insurance company, or a big mutual fund company,” Jamie Hyndman, director of strategic business development at Mawer, said by telephone yesterday. “We’ve had people approach us many times and we’ve flat-out said ‘no. No interest.’”

Sector Consolidation

“We’re not looking to be acquired,” Greystone CEO Robert Vanderhooft said in a phone interview yesterday. There will be further consolidation in Canada’s wealth management industry, he said.

“It’s a space that’s consolidating,” said Simpson at Sentry, which manages C$10.5 billion including Industrial Alliance shares. “In Canada there’s limited opportunity. There’s a huge amount of risk because the market share taken by the banks grows each year.”

Any acquisition would spur growth across the country, Charest, 56, said from the company’s headquarters in Quebec City. The company, the second-largest non-bank broker in Canada by assets under administration, currently has about 3 million clients.

“We’d like to be increasingly present in Canada,” Charest said. “We still see more potential outside of Quebec. You should not underestimate the size of our operations in the Western provinces.”

Capital flowing into Canadian retail mutual funds jumped more than 80 percent in June over last year, according to a July 23 note to clients by Doug Young, an analyst at TD Securities.

Daily Flight

“Acquiring wealth management firms makes sense because of the growth potential,” Mario Mendonca, an analyst with Canaccord Genuity, said in a phone interview July 22. “Life insurance is not a fast-growing industry. A lot of life insurance products are capital intensive and most wealth management products are not.”

Mendonca rates the stock a hold with a price target of C$43. Three analysts rate the shares a buy, eight say it’s a hold, and one gives it a sell rating, according to data compiled by Bloomberg. The 12-month target price is C$41.30 per share, as forecast by 10 analysts, or 3 percent less than the closing price yesterday.

“The first time we made an acquisition in the mutual fund sector, people told us ’too little, too late’ and I will remember that up until my retirement,” said Charest, who has been with the company for more than three decades. “The end goal is just to continue the daily fight with 11 other financial institutions in Canada to grab as much business as possible.”

U.S. Deals

Industrial Alliance joins U.S. insurers purchasing fund managers to increase fee income. MetLife Inc. (MET), the largest U.S. life insurer, agreed to buy Chilean pension manager AFP Provida SA in a $2 billion deal in February. New York Life Insurance Co. took a stake in Cornerstone Capital Management Inc. to add about $2.7 billion in assets in September 2012.

Wealth managers are also expanding, taking advantage of operations that are slimming down to stay competitive. Fiera Capital Corp. (FSZ), the Canadian money manager controlled by National Bank of Canada (NA), bought Canadian fixed-income and equity assets from a unit of UBS for C$52 million in December. Fiera also bought the Canadian wealth-management arm of Societe Generale SA and paid C$309 million for National Bank’s Natcan Investment Management last year.

Stock Gains

Industrial Alliance, the best-performing insurance stock in the past 12 months on the six-member Standard & Poor’s/TSX Life and Health Insurance Index, more than doubled since July 25, 2012, when it hit C$20.74, the lowest since April 2009. The stock closed at C$42.56 yesterday in Toronto, for a market value of C$4.16 billion.

During the stock slump, investors were loathe to approve an acquisition of any size, according to Behrak Shahriari, a portfolio manager at Montrusco Bolton Investments Inc. who oversees C$700 million.

Mergers are “back on the radar screen and investors would now understand the company going out and buying something,” he said in a phone interview from Montreal on July 22. “Investors would not give them the leash to do that before because of stock performance. Now they’re back in the game.”

The company, which reports second-quarter results Aug. 1, is expected to earn 72 cents a share according to a survey of 11 analysts by Bloomberg.

Zero Risk

“With wealth management, you’re taking zero risk relative to traditional life insurance products,” said Shahriari, who owns Industrial Alliance stock.

The company has made 20 wealth acquisitions in the past decade, Charest said. Industrial Alliance, which has more than C$87.5 billion in assets under management and administration, announced a deal on July 16 to buy Jovian Capital Corp. (JOV) for C$94 million. The deal gave the new owners, pending approval by regulators, additional assets under management and administration of about C$7 billion.

The company may need to raise money via debt or equity to finance a larger acquisition, Simpson said. That may make investors question whether the deal is worth it or if the capital can be better spent to benefit shareholders, he said.

“At the end of the day the big question is: what kind of distribution capabilities do you have?” Charest said. “If you have an edge there you might win. If you don’t have anything, it might be tough for you.”

To contact the reporter on this story: Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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