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National Bank in talks to buy Wellington West

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National Bank of Canada (NA-T) is in talks to buy mid-size brokerage Wellington West Holdings Inc. in an effort to bolster its presence outside Quebec, as the bank aims to grow through acquisitions. Canada’s sixth-largest bank is said to have put a bid on the table for the remainder of Winnipeg-based Wellington West that it doesn’t already own, valuing the independent brokerage at more than $350 million.

Though the process could stall, sources indicate the two sides are in advanced discussions.

National Bank already holds a 16.8-percent minority stake in Wellington West, an investment adviser that began as a boutique firm in the early nineties and has since expanded across the country.

The Montreal-based bank bought 12.5 percent of Wellington West in 2008 for $35.8 million, valuing the company at about $287 million at that time. It has since increased its holding through an option to buy up to 5 percent more of the privately held shares.

As smaller investment firms feel the pinch of lower trading volumes and smaller margins, consolidation is becoming a buzzword among brokerages, particularly in the middle tier of the market.

National Bank, which has surplus capital on hand after stockpiling funds during the financial crisis, told shareholders at its annual meeting on Wednesday that it expects to be making acquisitions in the months ahead.

In an interview following the meeting, chief executive officer Louis Vachon said the bank would particularly like to increase its wealth-management capabilities across Canada. “We realize that the market in Canada is already quite consolidated, but to the extent possible we will look at some acquisitions,” Vachon said.

He wouldn’t comment on whether National Bank is holding talks with Wellington, but Vachon said the bank is pleased with the performance of the firm since buying its minority stake.

“Would we have an interest in Wellington West? I think the answer is yes,” Vachon said. “Otherwise I don’t think we would have become a minority partner. But the timing is theirs, and they have other shareholders, so we’ll have to see what happens.”

Charlie Spiring, Wellington West founder and CEO, said he could not comment. Three months ago, Spiring said his firm was still looking to become an acquirer, noting the brokerage would have to get bigger “or one day I will be a seller.”

National Bank’s stake in Wellington West gives it the right to match any offer that comes in. Sources close to both sides say the two began talking about a deal last year, but were far apart on price, with National Bank valuing the business at about $300-million, and Wellington West seeking a valuation of about $400-million.

Though a deal seemed close in December, an agreement never came together. The two partners have apparently come back to the table, however, sources stressed a deal may not be imminent. Wellington West sought outside interest and received a bid, one source said.

Analysts expect consolidation among smaller and mid-sized brokerages to be a key theme in 2011, as financial firms cope with lower margins and look to increase their clout in the market. The number of securities firms in Canada has dropped about 4 percent to 195 since the financial crisis.

Wellington’s revenue has bounced back after the financial crisis, but its profits still lag behind where they were a few years ago – a sign of the times for the sector. Revenue was $154-million in the most recent fiscal year ending June 30, 2010, up from $134-million in 2007. However, the company posted a small loss last year, compared with a profit of $7.8-million in 2007.

National Bank, which has total assets of about $145 billion, has surplus capital on its books since the financial crisis. At the company’s annual meeting, Vachon told shareholders that acquisitions made by the bank wouldn’t prevent further dividend increases. National Bank was the first to raise its dividend after the financial crisis, hiking its payout to investors in November by 6.5 percent.

Vachon also told investors that National would consider splitting its shares. The stock has gained 26 percent over the past year and closed at a record high on Wednesday. “We want to make sure our share price remains affordable … so we’ll be examining it very closely,” Vachon said at the annual meeting.

In a post-meeting interview, Vachon said the bank also wants to expand its network of retail branches across Canada. The bank has groups of branches in several provinces and wants to expand on that strategy.

“We have clusters of branches and commercial operations in New Brunswick and Ontario,” Vachon said. We are at the state of exploring the possibility of doing the same thing in Western Canada. National Bank is opening a new branch in a suburb of Calgary and is also contemplating new branches in Victoria, he said.

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