CI Financial
is moving ahead with plans to separate its U.S. and Canadian businesses, and intends to use proceeds from a planned U.S. IPO to pay down debt stemming from an acquisition spree.
The offices of CI Financial
CI Financial
In the past three years, the Canadian asset and wealth manager has expanded into the U.S. wealth management market, buying up dozens of registered investment advisors. The firm’s acquisition push occurred amidst record M&A deals among U.S. wealth management firms. CI Financial’s strategy has generated higher assets under management. The company also has more debt.
The company had net debt of 3.7 billion Canadian dollars ($2.7 billion) at the end of the third quarter, up from C$2.7 billion for the same period a year ago. CI Financial reported C$1.7 billion in net debt for the third quarter of 2020. Earlier this year, S&P Global Ratings lowered CI Financial’s credit rating from BBB+ to BBB, a low tier of investment grade.
On Thursday, CI Financial reported net income had declined to C$14.9 million from C$44 million in the recent quarter due to higher expenses. The Toronto-based company reported earnings per share of eight cents, far below analysts estimates of 48 cents. Excluding nonoperating items, adjusted net income was C$135.9 million and adjusted earnings per share were 73 cents, in line with analysts’ estimates.
The stock rose 3.7% on Friday, however as CI affirmed its U.S. IPO plans and plans to reduce debt. CI FInancial is currently trading at $10.40 per share. Its stock price is down 45% so far this year.
Earlier this year, CI Financial said it planned to take its U.S. wealth management operations public. That division had about C$150 billion in assets under management at the end of the third quarter, up from C$97 billion for the same period a year ago. CEO Kurt MacAlpine provided more details about those plans during an earnings call Thursday, saying the company will conduct the U.S. IPO once the regulatory process is complete and market conditions permit.
The company’s Canadian business intends to delist its shares from the New York Stock Exchange around the same time as the IPO of the U.S. wealth management business, and will subsequently trade exclusively on the Toronto Stock Exchange. CI Financial’s U.S. business will trade exclusively on a U.S. exchange.
The U.S. business will also launch debt free, a move that “will allow us to maximize on our scale and margin,” he said. The Canadian business will retain the debt and won’t do any additional M&A deals, MacAlpine said on the call.
Importantly, he said CI Financial will use proceeds from the IPO to pay down debt. “The plan is to delever our business,” he said. “We’re using cash flows to delever now. We have the IPO proceeds going to that. And each business post-IPO will have different capital goals.”
“The listings will be reflective of the primary market the businesses operate in,” MacAlpine said, adding that he thinks the company’s stock is not being fairly valued at the moment.
Jim Shanahan, an analyst at Edward Jones, rates CI Financial’s stock as a hold. “They’ve embarked on a strategy to frankly reinvent the business,” he says. “We’ve been more or less concerned about the debt level.”
Shanahan notes that the company’s acquisition pace has slowed and it may have opportunities to generate greater efficiencies among the RIAs it has acquired. It’s low hanging fruit, Shanahan says.
“We’ve been cautious on CI,” he says. “That said, I think there might be something here. We might have a more favorable view on the company at some point. The leverage is an issue because even though they have been aggressive in buying back stock and making acquisitions, they’ve used a lot of leverage to get that done.”
During the quarter, the company repurchased 5.6 million shares at a cost of $79.8 million.
Kyle Voigt, an analyst for Keefe, Bruyette & Woods, maintains an outperform rating for CI Financial’s stock.
“We like CI Financial’s exposure to the registered investment-advisor (RIA) industry via its acquisition strategy, which continues to benefit from structural growth tailwinds, as well as CI Financial’s restructured asset management business,” Voigt wrote in a research note. “We expect the M&A environment to remain favorable near term, helping drive another strong year of CI Financial’s acquisition activity.”
CI Financial completed the two RIA acquisitions in October, adding $17.9 billion in assets to its U.S. wealth management business, the company said.
MacAlpine, who became CEO in 2019, said during Thursday’s the earnings call that the company is executing on its strategic plans to modernize its asset management operations, expand its wealth management business, and diversify geographically. He pointed to what he said are improvements CI Financial has made in its asset management business, such as taking a team approach toward managing funds and centralizing some functions. Those changes should result in greater efficiency, he said.
Write to Andrew Welsch at andrew.welsch@barrons.com
Corrections & amplifications: CI Financial had net debt of 3.7 billion Canadian dollars at the end of the third quarter, up from C$2.7 billion for the same period a year ago. A previous version of this article stated it was C$3.9 billion and C$2.6 billion, respectively.
