CIBC sells minority stake in American Century

“When we bought into ACI in 2011, we were not able to negotiate a path to control but hoped there would be an opportunity to explore that over time,” according to a statement by CIBC sent to Investment Executive on Monday. “As it became clear the Stowers Institute [for Medical Research] wanted to retain control and was not interested in selling, we made the decision to monetize our investment.”

The Stowers Institute for Medical Research, in Kansas City, and ACI were both founded by James Stowers Jr. The institute now owns controlling interest in ACI following Stowers’ donation of his equity ownership in the firm to the institute. Stowers died in 2014.

This sale allows CIBC to focus on other opportunities in the U.S. that may offer greater long-term growth.

“As we stated at our October Investor Day, the private banking and private wealth management spaces are particularly attractive areas for us to further build out our U.S. footprint,” says the statement. “We remain focused on leveraging the strong U.S. platform we have through Atlantic Trust [Group LLC based in Atlanta, Ga.] to build our advisory presence in the U.S.”

CIBC’s decision to sell its stake in ACI makes sense considering it was unlikely to ever own more than its original stake in the U.S. company, but any other reasons for the sale remain a mystery for now, according to Jim Shanahan, a senior equity analyst at Edward Jones in St. Louis, MO.

As CIBC’s statement indicates, the move may help the firm with acquiring an attractive business in the U.S.

“[The firm was] targeting a relatively low investment of a few billion dollars in a franchise here and there really isn’t anything of that size that would really move the needle for [CIBC],” Shanahan explains. “But if they can find something with a decent brand name recognition in the market and a good strong core franchise, maybe it’s something they can invest capital in and grow here in the [U.S.]

However, the sale of the ACI stake could also be a defensive move for a Canadian bank with a significant loan business, which includes commercial loans to those in the troubled oil and gas industry and personal loans in regions like the Prairies, where there have been significant job losses, says Shanahan.

“They are not making bad loans … I’m saying they have a lot of loans,” he adds. “[The sale of ACI would provide] capital to potentially offset [what might be] accelerating losses in those portfolios.”

The sale of CIBC’s equity interest in the U.S. investment management firm will generate a gain of approximately US$170 million, net of taxes, and an 11% internal rate of return, with proceeds and dividends net of tax, for CIBC shareholders.

The sale will add 50 basis points to CIBC’s common equity tier 1 ratio, which was reported as 10.8% for the fourth quarter of 2015. The Canadian bank maintains its medium goals as outlined in its investor day presentation in October, according to CIBC’s statement.

The two financial firms will maintain a working relationship as ACI provides sub-advisory services to several funds and investment portfolios managed by CIBC Asset Management.

The sale is expected to be completed in the first half of 2016 should it receive regulatory approval.