Sep 2006 Financial News

Scotia set to acquire DB&G?

Sep 13, 2006

On the heels of last month's declaration by Bank of Nova Scotia (BNS) president and chief executive officer Bill Clarke that his bank would seek to grow its wealth management division, reliable sources tell the Business Observer that BNS is set to acquire brokerage house Dehring Bunting & Golding (DB&G).

Yesterday, Mark Golding, DB&G company secretary, offered a terse "no comment", when contacted by the Business Observer, while the newspaper was unable to speak with DB&G chairman Peter Bunting, president Gary Sinclair and Scotiabank's Clarke.

Yesterday, financial experts, who said that the sector has been abuzz with talk of the acquisition for some weeks now, argued that the move would give BNS an enhanced presence in the securities business while allowing the principals of DB&G to cash out on a high note.

"BNS is so far behind in the investment banking business that it would suit them to acquire DB&G," said Oliver Chen, former vice-president of mutual funds at First Global Financial Services.

An executive with a listed brokerage firm who asked not to be named said, "Every other revenue line item for BNS brings in billions while the investment banking arm makes only millions. The merger would boost BNS' earnings. I think it is a good deal for BNS."

Although BNS is considered Jamaica's number one bank, its dominance has only been in the deposit-taking and loan-granting aspects of financial services where it controls 42 per cent and 44 per cent of each market respectively as at June 30, 2006.

BNS's latest results for the period ending July 31, 2006 shows that investment banking only contributed 3.283 per cent or $223.84 million to the overall profit before taxes of $6.818 billion.

"It would suit DB&G to sell, as the spreads on money market instruments are narrowing and the margins are going to be slim for the short term," said Chen. "Bunting and the other executives may be thinking it is time to cash out on a good note."

For the period of June 30, 2006, DB&G had $33.4 billion worth of funds under management, a growth of 10 per cent over the same period in 2005. However, net profit was $147 million, a marginal decline of 2.65 per cent from the $151-million earned in the June 2005 period.

Chen believes that it is the success of NCB and its wealth management subsidiary NCB Capital Markets that has spurred BNS into action. NCB Capital Markets provided 45 per cent of NCB's 2005 profits. "The banking sector has shifted its focus to securities as the public has become more sophisticated," he said. "People want more than a savings account and a current account."
Chen said that for some time BNS has tried to grow its investment banking arm. "The division was first known as Scotia Trust, and then it was renamed Scotia Investments," he said. "The whole objective of that arm was to sell the Scotia Mutual Funds, but they have not found great success in that area. They need to find a way to get their commercial banking clients to become investment banking clients."

Yesterday, financial experts, speculating on the value of such a deal, noted that as at Tuesday's trading, DB&G's stock was sold for $16.10 per share. The book value of the company is $10.57 billion and its market capitalisation is $4.979 billion based on 309 million shares outstanding.

"Valuing DB&G is based on what DB&G will bring to the table," said banker Aubyn Hill. DB&G has a stockbroking license with eight branches in Jamaica and one in Trinidad & Tobago.

One stockbroker who spoke on condition of anonymity explained how such a deal could be valued. "On a transaction like this there would be three methods that could be used to price DB&G," the broker said. "There is price to book value, the value of current earnings and the value of future earnings.

However, compared to the rest of the financial services industry, DB&G have the lowest price earnings ratio, 5.76 compared to an average of 9.53. DB&G could argue," said the stockbroker, "that the markets have undervalued the worth of the business and ask BNS to pay a premium for the company."

However, the stockbroker said that what wasmore likely was that "a combination of the three valuation methods will be used to reach a final number".
Hill, in his analysis, said, "BNS is buying intellectual prowess and contacts, and this comes in the shape of people. The risk BNS faces is how do you convert owners into employees? When big investment houses are bought out, you tend to see the big names leave to start their own business.

The plus is that if BNS has the right negotiation team, they can give the old owners enough incentive - equity or profit share in BNS - to keep the principals interested. They will also probably have the managers sign a non-compete agreement; but what you want is the owners of DB&G to come to BNS with the same aggression and drive."


Source:
Dennise Williams
The Jamaica Business Observer
Wednesday 13th September, 2006

http://www.jamaicaobserver.com/magazines/Business/html/20060912T190000-0500_112824_OBS_SCOTIA_SET_TO_ACQUIRE_DB_G_.asp