Scotia buys C$2.3 bln CI stake from Sun Life

By Lynne Olver

TORONTO (Reuters) - Bank of Nova Scotia (BNS.TO) said on Monday it will buy Sun Life Financial's (SLF.TO) stake in fund manager CI Financial CIX_u.TO for C$2.3 billion, giving the bank a coveted boost in the wealth management area and providing Sun Life with funds to go after acquisitions.

The cash deal for 104.6 million CI units at C$22 per unit will make Scotiabank the biggest shareholder in the country's third-largest mutual fund company, with a 37.6 percent ownership stake. It will immediately increase Scotiabank's profit, executives said.

CI had about C$99 billion in fee-earning assets as of July 31, mainly in retail mutual funds.

Shares of both Sun Life and Scotibank were lower on the Toronto Stock Exchange on Monday morning, while units of CI Financial rose slightly.

For Sun Life, which took an initial 30 percent stake in CI Financial in July 2002, the sale of its interest will open the door to potential purchases in an era of unprecedented turmoil in the financial services sector.

"We see opportunities in the U.S., we see opportunities in the rest of the world, Sun Life Chief Executive Don Stewart told a conference call. He said the insurance company would be capable of doing more than one transaction, if they were in different business lines and different geographic areas.

He declined to say whether Sun Life was bidding for assets of U.S. insurance giant American International Group, but said the Canadian company was interested in opportunities "that are in the public domain."

For Scotiabank, the acquisition is the latest in a series of recent wealth-management buys, and will immediately add to earnings, bank executives said on a separate conference call. It will add 4 Canadian cents a share to Scotia's profits in the first year, rising to 8 Canadian cents by the third year.

With this strategic investment, and last's year's purchase of a minority stake in DundeeWealth Inc (DW.TO), "we have a very strong association with two of the leaders in the mutual fund industry," Scotiabank President and Chief Executive Rick Waugh said.

The hasty deal came together over the weekend, after Sun Life approached Scotiabank on Friday about a possible transaction, said Chris Hodgson, the bank's executive vice president and head of domestic banking.

That prompted analysts to press Sun Life executives about whether they needed to raise capital fast because of internal issues, but executives brushed off the questions.

"Even without this transaction, our capital position is strong," Sun Life Chief Financial Officer Rick McKenney told them.

"We're in a strong position going into this (deal)," Stewart echoed.

As for what will happen at CI, Scotiabank executives said they planned to sit down with their CI counterparts in the coming weeks to discuss opportunities to create value.

"That could include a number of different things," Hodgson said, without giving details.

Scotiabank could either buy CI outright, or sell its own mutual fund business to CI, "which we believe is more likely," wrote John Aiken, an analyst at Dundee Securities, in a research note.

The deal is expected to close in 45 days, and is contingent on the usual regulatory conditions, Scotiabank said.

Luc Vanneste, Scotiabank's chief financial officer, said the bank was prepared to accept CI Financial's conversion to a tax-paying corporation within a couple of years, when all Canadian income trusts will lose their income tax-sheltered status.

Bill Holland, chief executive officer of CI, said that the product and distribution partnership between his company and Sun Life would continue.

Sun Life and Scotiabank shares were each down about 4.5 percent on Monday morning, while CI Financial shares rose nearly 2 percent to C$16.94.

The S&P/TSX composite was down 7.8 percent, falling to 9958.18, below 10,00 points for the first time since July 2005.

($1=$1.08 Canadian)

(Additional reporting by Scott Anderson; Editing by Frank McGurty)