CI Financial Corp. (TSX:CIX, Financial), a North American asset and wealth manager, has announced that it is selling a 20% stake in its U.S. wealth management business, CI U.S., to a group of global institutional investors for 1.34 billion Canadian dollars ($1 billion). The deal is expected to close by the end of May, subject to regulatory approval.
The deal values CI U.S. at CA$7.1 billion, which is more than the entire enterprise value of CI Financial and three times its market capitalization as of May 10, the day before the deal was announced. The company will retain an 80% ownership of CI U.S. after the transaction closes. The deal will help CI Financial reduce its debt and fund its growth strategy in the U.S. market. The investment is in the form of convertible preferred equity (convertible into CI U.S. common at future event, such as an initial public offering of the U.S. business).
About the company
CI Financial is a provider of asset and wealth management products and services, primarily in the Canadian market. The company had CA$114.2 billion in fund assets under management, and another CA$223.8 billion in wealth management assets under advisement at the end of September 2022, making it one of the largest nonbank affiliated asset managers in Canada. The company operates its fund business through CI Global Asset Management, which offers a broad selection of investment funds. On the wealth management side, the company operates through CI Assante Wealth Management, Aligned Capital Partners, CI Private Wealth as well as a growing group of acquired U.S.-based registered investment advisors, providing financial advice primarily to high net worth individuals and families.
Asset management and wealth management are two different but similar concepts. Asset management is the management of investments on behalf of others, while wealth management is the management of investments and financial planning for wealthy individuals. Wealth management is a broader category that includes asset management as well as other services, such as estate planning, tax planning and philanthropy. Asset managers typically work with institutional investors such as pension funds, endowments and insurance companies, while wealth managers work with individual clients.
About the deal
The investor group includes Bain Capital, a private equity firm, a subsidiary of the Abu Dhabi Investment Authority, a sovereign wealth fund, Flexpoint Ford, a private equity firm focused on financial services and health care, Ares Management funds, an alternative asset manager, the State of Wisconsin Investment Board, a public pension fund, and other unnamed investors. So this is a group of long-term institutional investors known colloquially as "smart money."
CI Financial has been on a torrid acquisition spree in the U.S. since 2019 under CEO Kurt MacAlpine, buying more than 30 registered investment advisory firms for a total of $2.85 billion in cash, stock and future payments. CI U.S. now has over $70 billion in assets under management and operates across 16 states. The company has been acquiring RIA firms as part of its strategic priorities of globalizing and expanding its wealth management platform focusig on high net worth clients. Prior to its recent expansion strategy, CI Financials, which was the largest non-bank sponsor of mutual funds in Canada, has been diversifying its business into the U.S. RIA market, as it is higher margin and faster growing than the legacy Canadian mutual fund business.
However, the rapid expansion also increased CI's debt burden, which reached $2.6 billion as of Dec. 31, 2022. The company's debt-to-Ebitda ratio rose to 4.3, leading to a credit rating downgrade by S&P Global Ratings to BB+, or junk status.
The rapid buildup of debt had given investors heartburn, sending the stock lower. CI has been buying back shares, but executives have expressed frustration at the company’s low valuation as the market has grown more and more concerned about the increasing debt in the face of a slowing economy and a bear market. The company was selling at a forward price-earnings ratio of less than 5 prior to Thursday's announcement.
The sale of the minority stake in CI U.S. will help the company reduce its net debt to $1.3 billion and lower its leverage ratio to a much stronger 2.7 versus 4 previously. The company’s stock market value, including both its U.S. business and its profitable Canadian fund management arm, was just CA$2.3 billion as of Wednesday’s close. CI Financial also plans to sell its 45% ownership stake in Congress Wealth Management, one of its U.S. subsidiaries, for $160 million.
The deal comes after CI Financial filed for an initial public offering of CI U.S. in December 2022, but decided to postpone it due to market conditions and strong interest from private investors. MacAlpine said the IPO is still the "intended path" for CI U.S., but not in the near term. The deal takes the pressure off the company and it can now afford to wait out the expected economic downturn and perhaps do an IPO in the U.S. in 2025 or beyond.
Valuation
CI Financials' shares soared 45% to CA$18.11 on the Toronto Stock Exchange after the announcement before ending the day at CA$15.40. The implied value of the U.S. business exceeds the enterprise value of the entire company on Thursday. Given that CI still owns 80% of the U.S. business and 100% of the Canadian business, basically we are getting the Canadian business, which was worth over CA$4 billion in 2018 (prior to the U.S. expansion) for free.
The sale also allows CI Financial to maintain flexibility and control over its U.S. wealth management division. The sale implies substantial upside to CI Financial's shares on a sum-of-the-parts basis and is a net deleveraging event, which strengthens its financials and removes a big impediment to its share price.
Source: Company Presentation
CI's GF Score is robust at 91 out of 100. GuruFocus backtesting shows that companies with GF scores over 90 have superior performance potential. The company has high profitability and growth ranks, but had a low financial strength rating. This new development will reduce leverage and improve the financial strength metric, I expect the score to rapidly improve in the months ahead.
The valuation panel also shows excellent value. Looking at the value given below, I would estimate an intrinsic value in the low $30s for the stock, though it will take several years to blossom.
Overall, I think CI Financials in very good value at this price.
