UPDATE 3-Canaccord posts profit amid acquisition talk

Thu Feb 4, 2010 12:24pm EST

* Q3 EPS C$0.27 vs year-ago loss C$1.27

* Revenue doubles to C$173.2 million

* Focus on reported bid for Genuity

* Shares down 1.9 pct at midday (Adds comments from conference call, analysts)

By Andrea Hopkins

TORONTO, Feb 4 (Reuters) - Strong investment banking gains drove Canaccord Financial Inc (CF.TO) to an unexpectedly strong profit in the third quarter, and market attention turned to its reported bid to buy rival Genuity.

The Vancouver-based investment dealer, which changed its name from Canaccord Capital in December in a rebranding effort, declined to comment on a rumored bid for Genuity, but said it "can and will do" more to build on its global platform.

"Any acquisition we would look at ... firstly, would have to have a strong cultural and strategic fit for us to take a look at it. And then any acquisition we would look at, as we've always stated, would have to be accretive to earnings immediately," Chief Executive Paul Reynolds told analysts on a conference call.

The Globe and Mail newspaper reported on Wednesday that Canaccord had made an offer to acquire privately held Genuity Capital Markets in a deal valued at C$100 million ($94 million).

Genuity had no immediate comment, but market rumors about a deal prompted Canaccord to issue a statement affirming it "regularly evaluated potential acquisition opportunities."

Shares of Canaccord were down 1.9 percent at C$9.61 on the Toronto Stock Exchange at midday as investors mulled its quarterly results and the possible impact of an acquisition.

"Though worry regarding share dilution is certainly warranted and may keep a lid on the stock in the near term, in our view the potential to add capabilities in areas that the company has traditionally been underrepresented (M&A, TSX 60 research/sales/trading) to its strong-suits of corporate finance and retail brokerage is certainly intriguing," Macquarie analyst Sumit Malhotra said in a research note.

Canaccord, Canada's largest independent brokerage, surpassed market estimates on Thursday with third-quarter earnings of C$15.1 million, or 27 Canadian cents a share. That compared with a loss of C$62 million, or C$1.27 a share, in the third quarter of 2008, which included substantial one-time charges.

Analysts on average had expected earnings of 21 Canadian cents a share, according to Thomson Reuters I/B/E/S.

"The earnings beat was primarily driven by strong top-line results, with better-than-expected investment banking revenues as well as principal trading," Scotia Capital analyst Phil Hardie wrote, noting that the quarter represented Canaccord's strongest investment banking performance since June 2007.

Revenue surged 98.6 percent from a year earlier to C$173.2 million, and was up 40 percent from the second quarter.

Third-quarter profit was driven by gains in investment banking. The company participated in 140 deals, recording proceeds of C$12 billion, and leading or co-leading 61 of those deals. The company's capital markets teams are concentrated in Canada, Britain and the United States.

Assets under administration rose 35.2 percent from a year earlier to C$12.2 billion, while expenses fell 5.5 percent.

"Looking ahead, we are cautiously optimistic about the near-term market outlook and the pipeline of opportunities we're seeing in our capital markets business," Reynolds said in a letter to shareholders.

"But we are more cautious about the longer-term impact of global dynamics, such as excess liquidity, commodity cycles and the evolving regulatory frameworks, on market valuations."

($1=$1.06 Canadian) (Reporting by Andrea Hopkins in Toronto and Ashutosh Joshi in Bangalore; editing by Rob Wilson)

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