The consolidation of the Canadian asset management business continued Tuesday with the announcement that Toronto-based AGF Management Ltd. (TSX:AGF.B) is buying Acuity Funds Ltd. and Acuity Investment Management Inc. for about $325 million.

The deal is the second major M&A transaction in the sector in the past week, following last week;s announcement that Bank of Nova Scotia will be buying the 82% of DundeeWealth it didn’t already own for about $2.3 billion.

AGF expects to pay about $325 million in a mix of cash and stock for Acuity. Under the terms of the agreement, $223 million will be paid upfront when the deal closes, which is expected to be Feb.1, 2011, with the rest to be paid out over the next three years based on asset retention and client growth targets. Acuity shareholders will receive about 60% of the purchase price in cash and 40% in AGF class B non-voting shares. The deal is being funded by $200 million in bank financing.

The acquisition will increase Toronto-based AGF’s total assets under management to over $51 billion, boosting its retail mutual fund assets to about $26.2 billion.

Acuity, a Toronto-based investment management firm, currently manages approximately $7.4 billion for retail, institutional and high net worth investors.



On a conference call to describe the deal, executives pointed out that the transaction shifts AGF’s mix of assets under management from 51% mutual funds to 49%, while increasing the institutional portion of its business from 42% to 43%, and high net worth component from 7% to 8%.

Within the mutual fund area, the deal also alters AGF’s asset mix. The addition of Acuity’s funds, on a pro forma basis, would reduce AGF’s equity exposure from 63% to 58%, while boosting the balanced fund segment from 25% to 29% of assets, and fixed income from 10% to 11%.

AGF stressed that the deal, which it expects to be accretive in 2011, boosts its presence in the balanced, fixed-income, and socially-responsible investing segments, while also bolstering its institutional and high net worth exposure. At the same time, Acuity’s funds will benefit from AGF’s scale and its much greater wholesaling and marketing muscle.

The firms said that the Acuity portfolio management team remains unchanged, and that its managers will be shareholders in AGF with long-term incentives to stay with the firm. Ian Ihnatowycz, Acuity’s founder and CEO, will be retiring from day-to-day operations, but he will be joining AGF’s board, and will be a significant shareholder in the combined firm, following the deal’s completion.

AGF executives declined to give any specifics on how the fund lineups of the combined firms might change after the deal is complete, and whether it will be keeping the Acuity the brand or not. They indicated they will have more to say on that front following the closing of the deal, although they anticipate there will be some fund consolidation in 2011.

Indeed, the pressure of industry consolidation, particularly among distributors, was one of the forces that drove Acuity’s decision to sell, Ihnatowycz indicated. “The consolidation that has been going on has made it a little more difficult for the mid-sized firms to compete. The more competitive, bank-dominated environment has caused our growth to plateau over the last number of years, and so we felt that joining a company like AGF was a natural fit and enhanced our ability to grow in this space,” he said on the conference call.

AGF’s chairman and CEO, Blake Goldring, indicated that the two companies have been working on the deal for a couple of months now.

It all came together in a recent lunch the two CEOs shared, Ihnatowycz said. At that meeting, they broached the topic of what a merger of the two firms might look like, he said, and, “The benefits just leapt off the page at us, we couldn’t resist it. One thing led to another, and here we are today.”

“We are all very excited to join forces with AGF, a firm who shares our belief in the value of independent investment decision making and supports the value of independent financial advice through independent financial advisors,” Ihnatowycz added.

IE