CI deal a blockbuster

Talk about shaking up a sleepy Friday in August! At 6.45 a.m. on Aug. 22, CI Fund Management sent out a press release announcing that it is buying both Synergy Asset Management and Assante Canada. That completed a huge triple-play for the company, which a day earlier announced the purchase of Skylon Capital, which manages the VentureLink series of labour-sponsored funds.

CI has a well-earned reputation as being a very aggressive company, but these moves have clearly put it close to the top of the pyramid in the Canadian mutual funds industry.

It will still trail Investors Group by a small margin in terms of fund assets under management once the deals close, and when you add in the assets of Mackenzie Financial (also owned by Investors), that Winnipeg-based firm is still a clear number one. But CI has a lot of momentum, and is closing fast.

The deals, which will close in the fall, will provide CI with several advantages. They include:

* Its own distribution network. Assante is a very large operation, with more than 1,000 financial planners across the country. Efficient distribution is the key to success for a mutual fund company and CI will now have a retail network at it controls. The planners are expected to continue to sell other fund lines, but it is obvious that CI funds will move to the top of their lists.

* A strong new brand name in Synergy. Under the direction of Joe Canavan, Synergy was one of Canada’s fastest-growing companies and has never experienced a month of net redemptions since the firm was started in 1998. During a conference call on Friday morning, CI president Bill Holland said that the Synergy brand name would be retained under the CI umbrella for “all the funds they have that are doing well”. Other CI lines include Harbour, Signature, Landmark, and funds that bear the company’s own brand.

* The addition of Canavan to the CI management team. He will take on the job of overseeing the Assante distribution network, which is a perfect fit since he is known throughout the industry as a super-salesman. Apart from being an astute businessman, Canavan is a top-notch speaker and is widely respected. He has signed a long-term contract, and his presence adds a dynamic force to CI’s entire operation.

In his conference call, Holland said the deal will be immediately accretive to CI in terms of EBITDA, net income, and free cash flow. About 61 million new shares will be issued as part of the financing but he said that this dilution will not have a negative impact on net earnings per share, which are actually expected to rise. CI’s debt will increase by $75 million when the deals close.

He said he expects to realize significant cost savings on the Assante side, with the elimination of $11 million in overhead. “Assante is the largest independent distributor of mutual funds in Canada,” he said. “It is already the lowest-cost operator in the business. This will make it even better.”

Sun Life Financial, which owns a one-third interest in CI, is on-side in these deals. They will purchase enough of the new shares to maintain their current equity stake. This is significant because it keeps Sun Life in a position to eventually make a take-over bid for CI, which some market-watchers believe will eventually happen.

Even before these deals, CI stock was starting to look interesting. In July, the company reported year-end results for its 2003 fiscal year (to May 31) which showed significant improvement in most key areas over 2002.

Total revenues for the year were $576.2 million, an increase from the $449.2 million reported in the same period in the prior fiscal year. The increase was due in part to the acquisition of the Spectrum and Clarica funds in July 2002.

Income before goodwill amortization was $71 million (32c per share), compared with $36.8 million (21c per share) for 2002. Net income was $71 million (31c per diluted share) compared with a loss of $61.4 million (35c per diluted share) in the prior fiscal year. EBITDA was $297.4 million ($1.32 per share), compared with $265.5 million ($1.51 per share) in fiscal 2002.

Total fee-earning assets, which are the life blood of a mutual fund company, increased 29 per cent to $33.1 billion, from $25.7 billion at May 31, 2002. When the acquisitions announced this week are completed, fee-earning assets will increase to $44.5 billion. As well, CI will acquire $10 billion in administrated assets as part of the Assante deal.

CI stock has been in a steady up-trend since March. Initial investor reaction to the announcement was positive, and the stock reached an intraday 52-week high of $13.65 before pulling back to close off 7c for the day.  It was recently trading at $13.45.

I rarely recommend stocks when they are trading near their 52-week highs, but I have made an exception here and have rated the stock as a Buy in the edition of my Internet Wealth Builder newsletters that was sent to members during the weekend following the announcement. CI has become an industry powerhouse. If stock markets continue to recover, this stock has the potential to trade in the $20-$25 range within three years.

The stock currently pays a quarterly dividend of 8c a share (32c a year) for a yield of 2.4 per cent based on the recent price. If the shares are held outside a registered plan, that’s equivalent to interest income of about 3.1 per cent in after-tax terms.

The stock trades on the Toronto Exchange under the symbol CIX. Consult with your financial advisor to determine whether it is suitable for your portfolio. (Sept. 2003)

Adapted from an article that originally appeared in the Internet Wealth Builder, a weekly electronic newsletter the provides top-quality, conservative investment advice. To take advantage of a three-month trial subscription available to users for just $24.97 plus tax, go to