Scotiabank buys DundeeWealth stake, bank unit

VANCOUVER, British Columbia (Reuters) - Bank of Nova Scotia BNS.TO said on Tuesday it will buy an 18 percent stake in DundeeWealth Inc DW.TO, positioning itself to expand its wealth management business, as promised.

At the same time, Scotiabank, Canada’s third biggest bank, will also buy Dundee Bank of Canada, a chartered bank launched just a year ago by DundeeWealth, in a combined transaction worth C$608 million ($594 million).

Scotiabank will pay C$260 million in cash for Dundee Bank, a small bank that had been raking in deposits but was recently shaken by its exposure to a troubled corner of Canada’s asset-backed commercial paper sector, a short-term debt market that ground to a halt last month.

Scotiabank said it will acquire 27.3 million shares of DundeeWealth at C$12.76 a share for C$348 million and be able to nominate up to three directors to DundeeWealth’s board.

The bank will also have the right to purchase up to 20 percent of DundeeWealth, a medium-sized wealth manager with C$62.6 billion in assets, and a right of first refusal on any more shares sold by DundeeWealth's parent, Dundee Corp DCa.TO.

“With three board seats and a right of first refusal on any future sale of the controlling interest, the acquisition positions Scotiabank to substantially expand its domestic wealth business should an opportunity present itself down the road,” Blackmont Capital Brad Smith said in a note to clients.

Canada’s big banks are increasingly moving into wealth management, attracted by the lucrative fees they can earn.

Shares in DundeeWealth jumped as high as C$13.40 on the Toronto Stock Exchange early on Tuesday after news of the transaction, a gain of 11 percent.

That was even after DundeeWealth said it will realize a net loss of about C$70 million on the sale of Dundee Bank “as a result of certain investments that are currently being valued below initial cost”.

“I think the ABCP economics forced their hand,” said Genuity Capital Markets analyst Mario Mendonca, referring to the recent loss in the value of asset-backed commercial paper instruments in Canada.

The country’s ABCP market operated by players other than the big banks ran into a credit crunch in August when buyers suddenly stopped purchasing these traditionally safe short-term debt investments because of concerns the underlying assets were exposed to the default-plagued U.S. subprime mortgage market.

DundeeWealth revealed on August 23 that the group was holding about C$400 million of commercial paper, instruments that are currently locked in a moratorium while the biggest players in that market try to hammer out a solution to prevent defaults.

“This is a strategic investment for us. DundeeWealth is one of Canada’s fastest-growing wealth management companies,” Rick Waugh, Scotiabank’s president and chief executive said in a statement.

DundeeWealth said it plans to use the proceeds of the deals to reduce its debt, including what it owes to Dundee Corp, and for other corporate purposes.

“Selling Dundee Bank is a decision that allows us to reinforce DundeeWealth’s focus on our strength as one of Canada’s leading money managers,” DundeeWealth president and chief executive David Goodman said in a statement.

“We believe this transaction will allow Dundee Bank of Canada to realize its full potential without the need for substantial new investment capital and significant management time,” Goodman said.

By 11.30 a.m. DundeeWealth’s stock was off its highs but still up 95 Canadian cents, or 8 percent, at C$13.05. Shares in Scotiabank were 24 Canadian cents firmer at C$52.19.

The deal, subject to regulatory requirements, is expected to be completed by September 28.

($1=$1.02 Canadian)

Additional reporting by Scott Anderson in Toronto