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AGF Management buying Acuity Funds

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AGF Management Ltd. (AGF.B-T) is buying Acuity Funds Ltd. for $325 million as consolidation in Canada's wealth management sector heats up and mid-sized firms have a harder time competing.

AGF, one of the country’s largest independent investment management firms, said Tuesday the deal will lead to quick growth as it adds customers and gains market share in fixed-income, balanced and so-called socially responsible investing – areas where AGF was “under-represented,” chief executive Blake Goldring told BNN.

AGF predicted the acquisition would add to earnings in 2011, but did not say by how much.

“AGF needs to increase its scale at this point, and it should be a deal that ultimately is positive for margins,” said Paul Holden, an analyst at CIBC, adding that the price appeared in line with recent deals in the sector.

Acuity manages about $7.4 billion in assets, and with the acquisition AGF's assets under management will rise to more than $51 billion from about $44 billion.

It’s the second time in a week that a sizable player in Canada's wealth management sector has bought up a smaller firm. Last week, the Bank of Nova Scotia agreed to buy the 82 percent of DundeeWealth it did not already own for $2.3 billion.

“It's a fragmented market and players are consolidating,” commented National Bank Financial analyst Peter Routledge. “It's not unusual for sectors to consolidate after a downturn.”

BANKS SQUEEZE MID-SIZE PLAYERS

Acuity founder and chief executive Ian Ihnatowycz said in a call with analysts that the consolidation trend was making it difficult for mid-sized firms to thrive. “The more competitive environment, the bank-dominated environment, has caused our growth to plateau of the last number of years, and so we thought that joining forces with a company like AGF was a natural fit and enhanced our ability to grow,” he said.

CIBC’s Holden noted that Canada’s banks “are continuing to squeeze the mutual fund space, so it's harder and harder to get positive sales as a mid-sized firm, so consolidation makes sense.”

The Acuity deal will help AGF to increase its institutional and high-net-worth assets, AGF said, adding that its institutional AUM will rise by 20 percent and its high-net-worth AUM will grow by 29 percent. After the acquisition closes, likely at the beginning of February, AGF's asset base will be almost evenly divided between institutional investors and retail mutual fund clients.

The acquisition will pay the shareholders of closely held Acuity 60 percent in cash and 40 percent in AGF class B nonvoting shares. The decision by Acuity’s principals to buy into AGF “I think speaks volumes,” Goldring told BNN. “People are focused on seeing growth,” he said.

'Moving from an intermediate-sized firm to one of the largest in the industry now is extremely important to us in our thinking, and the fact that it was independent is extremely important to us," Ihnatowycz added. "The whole array of products that we have, we believe, are very complementary to AGF and have the opportunity to really penetrate much, much larger markets with AGF's much stronger distribution and marketing capability."

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