DBRS Places DundeeWealth and Dundee Corporation Under Review with Positive Implications

DBRS has today placed the ratings of DundeeWealth Inc. (DundeeWealth) and Dundee Corporation Under Review with Positive Implications following yesterday’s announcement that the Bank of Nova Scotia (BNS or the Bank) is making an offer for the 82% of DundeeWealth that it currently does not own.

The cost of the transaction to BNS will be approximately $2.3 billion, which works out to a price of $21 per DundeeWealth share or a 17% premium to the 20-day average trading price. On a per share basis, the consideration will be in the form of $13.50 in BNS common shares, $5.00 in either BNS preferred shares or cash, a $2.00 special dividend to be paid by DundeeWealth and an estimated $0.50 in residual interest in Dundee Capital Markets, which is to be spun off to existing DundeeWealth shareholders.

The DBRS long-term rating of BBB on DundeeWealth reflects the strong investment management franchise operated under the Dynamic brand, with over $30 billion in mutual fund assets under management (AUM). While there will be some administrative expense synergies derived from the integration and potential for revenue synergies as BNS leverages the Dynamic brand through its global network, the DundeeWeath operation is expected to remain relatively independent and unchanged under BNS ownership. Since the BNS stakeholding in DundeeWealth had always been a positive rating consideration, the outright acquisition is positive for the DundeeWealth credit as it will now benefit from being a consolidated subsidiary of BNS. The spinning-off of the Dundee Capital Markets operation also removes a source of potential income volatility.

The decision as to whether or not the existing DundeeWealth senior debt and preferred shares will be called according to their respective terms is a financial decision to be taken by the Bank relative to the lower cost of internal refinancing.

With respect to Dundee Corporation, it is effectively replacing approximately 60% of its net asset value and over 50% of its average earnings represented by the 48% stake in DundeeWealth with shareholdings in BNS, including over $1 billion in BNS common shares, and $370 million in BNS preferred shares, as well as $150 million in cash. Since BNS enjoys a stable income and dividend profile and a AA senior debt rating (compared with DundeeWealth’s BBB rating), the overall credit quality of the Dundee Corporation investment portfolio is correspondingly enhanced. Moreover, shareholdings in BNS are expected to generate over $50 million in cash flow for Dundee Corporation, as well as represent a much more liquid investment than the previous holding in DundeeWealth.

While DBRS believes that these holdings in BNS shares are consistent with Dundee Corporation’s longer-term investment themes, should it choose at some point to reduce or eliminate its equity interest in the Bank of Nova Scotia, the rating on Dundee Corporation will come under downward pressure, given the less stable earnings contribution from its real estate and resource investments.

The Under Review status of the ratings for both DundeeWealth and Dundee Corporation is expected to be resolved on closing of the transaction, which is expected early in 2011.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Mutual Fund Companies and Rating Parent/ Holding Companies and their Subsidiaries, which can be found on our website under Methodologies